Should You Cash Out
To Pay Off Your Debts?

Question: Our home in Orange County, Calif., has most likely appreciated in value by approximately $225,000 in the last six years. The balance on our mortgage is $200,000. Unfortunately, we have significant debt with a home-equity loan balance of $100,000. With our current salaries, we can afford to pay only the interest on this loan. Our credit rating is also slipping. Should we consider selling and renting to get out of debt?

Judy: You picked the right place to buy a home. The median price in Orange County in this year's second quarter was $655,300, according to the National Association of Realtors. That's up 39% from a year earlier and 84% from 2001. Even San Francisco can no longer top your prices. Of course, home prices have been rising strongly in most of the country, but the buying frenzy in your area is exceptional. The median price in Orange is now 3.6 times the national median, up from 2.4 in 2001. Only 11% of households in Orange can afford to buy a median-priced home there now, the Realtors' California branch says. (That's no problem for people who already own a home but a huge barrier for those renting or considering moving in from, say, Fargo, N.D., where the median price is $124,200.)

I know you've got brilliant weather and Disneyland, but the gap between your housing costs and those of the rest of the nation can't expand forever. Under the sunny scenario that most Realtors are fond of spinning, house-price increases will merely slow, allowing incomes to catch up. Another possibility is that prices will flatten out or fall.

Already, the supply of unsold homes has begun rising in Orange as more people are tempted to sell and buyers balk at some of the crazier prices being affixed to houses. The California Association of Realtors says the inventory of previously occupied single-family homes in Orange County in July was enough to last 7.5 months at the current sales rate, up from 1.4 months in April.

So it's logical for you to consider cashing out. If moving to a cheaper part of the country is an option for you, you could sell your house in Orange, pay off all your debts and still afford a nice home somewhere else. But if you think only girlie-men flee Southern California, it makes sense to think about renting. Rents are currently very low in relation to house prices, and renters generally don't spend much on home improvements or repairs.

The risk, of course, is that if house prices in Orange don't fall and your income doesn't rise, you might have trouble getting back to homeownership. Still, you say that your finances are so strained right now that you can afford to pay only the interest on your debt. If you lose your job, would you be in danger of defaulting and losing your house? That's a disaster you want to avoid at almost any cost.

-- Mr. Hagerty is a staff reporter for The Wall Street Journal. His "House Talk" column appears most Fridays on RealEstateJournal.com. E-mail him your questions about the residential real-estate market. Please include your first name and city and state. If your question is answered and posted, we will show your first name and city. Due to volume of mail received, we regret that we cannot answer every question.

Email your comments to rjeditor@dowjones.com.