Home equity below 50 percent level
Home equity for the average American has dropped below 50 percent for the first time since World War II, reflecting a widespread decline in home values and relatively loose mortgage practices during much of this decade.
The average homeowners' equity - the mortgage balance as a proportion of the home's market value - fell to 47.9 percent at the end of 2007, the Federal Reserve reported Thursday. The Fed also issued revisions to earlier reports indicating that, for the first time in record keeping dating back to 1945, home equity was below 50 percent for the last nine months of 2007.
The drop below 50 percent is partly symbolic: Average home equity was declining even as the last housing boom approached its peak in 2005. But the newly issued number underscores the problems for millions of Americans struggling to hang onto their homes as their mortgage rates adjust upward and their property values decline. It also has broader implications for consumer spending in the nation's sputtering economy, up a paltry rate of 0.6 percent in the last quarter.
As the "wealth effect" powered consumer spending across the economy during housing boom, declining home equity fosters consumer caution.
"Consumers are growing more cautious, first, because they are now worth less, and they know it," says Mark Zandi, chief economist for Moody's Economy.com. "And secondly, because they can't borrow against their homes as aggressively as they did."
Economy.com estimates that by the end of March, 8.8 million homeowners, about 10 percent of homes, will have mortgage balances that equal or exceed the value of the property. The situation "is only going to get worse," Zandi says.
The decline in home equity reflects several factors, including the popularity of low- and no-down-payment mortgages and the surge in home equity lines of credit and cash-out refinancing during the housing boom, says Keith Gumbinger, vice president of rate tracker HSH Associates. That left many homeowners with no cushion when prices started to crumble.
Home foreclosures rose to an all-time high in the fourth quarter of 2007, the Mortgage Bankers Association reported Thursday.
The pain of declining equity is hardly uniform across the nation. In established neighborhoods that didn't experience a sharp rise in home values, many homeowners still have home equity of 70 percent or more, says John Karevoll, real estate analyst at industry tracker DataQuick.
And not all parts of the country have been hammered: In the fourth quarter, the National Association of Realtors reported, prices rose in 73 metro areas, including 11 that saw double-digit gains.
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