Americans’ percentage of equity in their homes fell below 50% for the first time on record since 1945, the Federal Reserve said. Homeowners’ portion of equity slipped to downwardly revised 49.6% in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9% in the fourth quarter — the third straight quarter it was under 50%. That marks the first time homeowners’ debt on their houses exceeds their equity since the Fed started tracking the data in 1945. The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter. Home equity, which is equal to the percentage of a home’s market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100% or more home financing. Economists expect this figure to drop even further as declining home prices eat into the value of most Americans’ single largest asset. Moody’s Economy.com estimates that 8.8 mln homeowners, or about 10.3% of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 mln households, or 15.9%, will be “upside down” if prices fall 20% from their peak… Experts expect foreclosures to rise as more homeowners struggle with adjusting rates on their mortgages, making their monthly payments unaffordable. Problems in the credit markets and eroding home values are making it harder to refinance out of unmanageable loans. The threat of so-called “mortgage walkers,” or homeowners who can afford their payments but decide not to pay, also increases as home values depreciate and equity diminishes. Banks and credit-rating agencies already are seeing early evidence of this.
Is a house first a home where people live or is it an investment. I opt for the former. It may turn out to be an investment but I consider that a by product.
Br Michael, You are absolutely correct. One should speculate only on what one can afford to lose….
RalphM
This is the product of years of people “refinancing” (e.g. taking the equity out of their homes) and “interest only” mortgages and “balloon payment” mortages where you pay only interest for several years.
Such instruments should be used sparingly, if at all. There is a time to take equity out of your home, but because you want to go on vacation or pay off credit cards because you can’t control your spending is not it!
YBIC,
Phil Snyder
One of the horrifying things about this situation is that not only have people borrowed beyond their means and counted on house prices always and only going up — but the selling of mortgages in bundles as an investment strategy has mushroomed. While there has always been something of a market in mortgages, it has only been in the past decade that they have been bundled together and sold as investments in themselves. From what I understand, the money to be made in buying and selling bundled mortgages came more from the fees involved in the transaction than from the inherent worth of the mortgages themselves (which in essence were a list of “accounts receivable”). Since a lot of the bundles were sub-prime loans to people who should not have had a mortgage, a lot of the bundles are worthless, for they will not be repaid. Since it is possible (I think) for the holder of a bundle of mortgages to make further loans based on the value of his “accounts receivable,” when that bundle becomes worth very little, then less is available as a resource to be loaned — and it becomes harder to borrow. And so on and so on… We are about to see a great shrinkage of the money supply.
Financial institutions used to be highly and tightly regulated. Perhaps they were too much so — but now all sorts of dreamers and schemers can figure out amazing ways to hold money and assets, and set up what amount to gigantic Ponzi schemes, which are great (selfishly) if you get in early, but which are a disaster in the long run. Regulation can stifle creativity, but sometimes creativity needs to be stifled for the long-term good of all.