Wealth Declines For Homeowners As Home Equity Dips Below 50%
Not since World War II – when the Federal Reserve began keeping such records – has homeowner equity been lower than 50%. On Thursday, March 6, 2008, USA Today reporter Sandra Block wrote that the Federal Reserve had reported that homeowner equity fell to 47.9% at the end of 2007. In fact, revisions to earlier reports revealed that homeowner equity was below 50% for the last nine months of 2007.
Homeowner equity is the home's market value less the mortgage balance.
While the drop below 50% is partly symbolic, average home equity actually began to decline as the last housing boom peaked in 2005.
A home is the single largest asset most Americans own. Home equity therefore accounts for a large portion of personal wealth. Americans struggling to hang onto their homes as mortgage rates adjust upward and property values decline have become quite cautious. Such conditions have broader implications for consumer spending in the USA's sputtering economy that rose by a rate of only 0.6% in the last quarter.
Mark Zandi, chief economist for Moody's Economy.com says, "Consumers are growing more cautious, first, because they are now worth less, and they know it. And secondly, because they can't borrow against their homes as aggressively as they did."
Economy.com estimates that 8.8 million homeowners or 10% of homes will have mortgage balances that equal or exceed the value of the property by the end of March.
This decline in home equity is based on several factors such as the popularity of low and no down payment mortgages and the surge in home equity lines of credit and cash-out refinancings during the housing boom. Many homeowners were left with no cash cushion when prices started to fall.
