Home Equity Falls Under 50%, Dragging Down Homeowner Wealth
Homeowner equity dropped to 47.9% at the end of 2007, according to the Federal Reserve, as reported in a March 6 USA Today article written by Sandra Block.  Most alarmingly, based on recalculations of previous reports, homeowner equity actually registered below 50% for the last nine months of 2007.  Homeowner equity hasn’t fallen below 50% since World War II when it was first recorded by the Federal Reserve.
Homeowner equity represents the home’s market value minus the mortgage balance.  Declines in average home equity actually began as far back as 2005 when the last housing boom hit its high point.
A large part of most Americans’ wealth rests in their home—the most expensive asset they own—and their home equity accounts.  As mortgage rates increase and property values decrease, many homeowners struggle to keep their homes, making them more cautious.  This impacts consumer spending and the entire U.S. economy, which in the last quarter rose only 0.6%.
“Consumers are growing more cautious, first, because they are now worth less and they know it,†said Mark Zandi, chief economist for Moody’s economy.com. “Secondly, because they can’t borrow against their homes as aggressively as they did.â€
According to economy.com, by the end of March 8.8 million homeowners, or 10% of homes, will experience mortgage balances equal to or greater than the value of their property.
Several factors contributed to the current home equity drop, including an increase in low and no down payment mortgages and the rapid rise of home equity lines of credit and cash-out refinancing deals offered in the midst of the housing boom. Â When home prices began to slump, many homeowners who took advantage of these arrangements found themselves with no cash cushion.
Our affiliation of lawyers is actively involved in advising individual and institutional investors in evaluating their legal options when confronted with subprime and other mortgage-related investment losses.
