Stumped By The Slump

With half his department recently laid off and his employer's budget for next year shrinking, Randy Holyfield, an executive for a nonprofit group in Highlands Ranch, Colo., was desperately seeking a safety net. He found one in his home. Holyfield refinanced his mortgage at the lowest rates in 30 years, cashing out a $40,000 cushion while holding his monthly payment steady. "The newspapers say unemployment is still low," offers Holyfield, 43. "Well, I have friends out of work, and others who had to leave the state for a job. It's worse than the numbers indicate."

Millions of homeowners are doing what Holyfield did, using their home as a bank to bridge tough times. Never before in a recession have so many had so much equity in their homes and the means to get at it. This unprecedented safety net of some $4 trillion to $5 trillion has softened the blow of the recession--which has been highly unusual in many other ways as well.

Start with what got us here. Businesses overspent to build things like PCs, Internet switches and routers, as well as speedy fiber-optic lines. That spending helped fuel the boom. But once corporate tech budgets tightened, tech stocks plummeted, and so did spending among consumers who held those stocks. Suddenly, those consumers felt much poorer. Typically, cycles work the other way. Robust consumer spending at the height of a boom induces businesses to build more plants at just the wrong moment--when the Federal Reserve is ready to dampen the whole party with higher interest rates to root out inflation.

So this recession has been backward from the beginning. Record layoffs have not stalled a torrid housing market. Those who keep their jobs are nonetheless getting hit hard this time because their bonuses, their profit sharing and even their salaries are being cut. Perhaps most revealing: technology, the industry that was supposed to end boom-bust cycles, made this one even worse.

There's good news too. The recession, which began in March and was officially declared on Nov. 26, already appears to be lifting. Last week came reports that housing starts and permits rose sharply in November. Home-builder stocks, classic early movers, have been on a tear. With the end in sight, here are some lasting lessons from an odd economic downturn:

Your home is your bank

Spurred by low interest rates and the desire or need to tap their most valuable asset, Americans this year refinanced more than $1.1 trillion of mortgages--roughly a fifth of all mortgage debt. In 65% of cases, homeowners borrowed more than they owed and used the difference to pay down credit-card debt, finance a home improvement or build a cushion for tough times. It's a low-risk way to get cash. "Very rarely have home values declined nationally, though pockets can take a hit," notes Dan Gilbert, ceo of Quickenloans.com

For a brief time in the 1990s, Americans had more equity in the stock market than they had in their homes. They have since learned that home values are far more stable and that their home remains a core investment.

The Fed influences consumers more than businesses