Byline: DAVID MYRON

Overdependence on home equity loans and lines of credit have economists concerned that consumers are financially over-extended and ready to cut back on spending.

Too many costs are gnawing away at consumers' wallets, and while the job market has improved over the past year, wages have not kept up with the cost of living.

To combat a significant jump in inflation, in 2000, the Federal Reserve started reducing interest rates, which eventually reached record lows in recent years. Still, the very strategy that economic regulators used to avert economic calamity and encourage consumer spending has encouraged consumers to go more into debt, argues Richard Hastings, an analyst at New York-based Bernard Sands, a retail market advisory firm. "We are now in an inflationary cycle," Hastings warns. "It really is a very serious issue."

He maintains that home equity debt levels are soaring. Additionally, he's concerned that Americans are not only taking advantage of the low interest rates to participate in the ubiquitous American dream of owning a home, but to eliminate high-interest credit card debts. On the surface, transferring high-interest credit card debts to low-interest home equity loans appears beneficial. However, according to Hastings, as home equity loans and lines of credit often enable consumers to borrow up to 10 percent of the value of their home, they are effectively increasing their borrowing power and debt levels.

Supporting his claim, he points to the increasing home equity growth rate in the U.S.. By the first quarter of 2003, home equity loan growth outpaced credit card growth by an average of 5.6 percentage points. By the same quarter in 2004, that figure jumped to 8.4 percent. What's more, U.S. home equity debt was at a record high of $415 billion for the second quarter (ending June 30), a 10 percent jump over the previous quarter, the FDIC reports. If home equity debt keeps increasing at current levels, it's on pace to break $500 billion by the end of the year. This is particularly disturbing to Hastings, as home equity debt was only about $125 billion in March 2000.