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Homeowners Have Less Equity Than Ever Before

The American dream that turned into a nightmare started with sub-prime loans and due to the trickle effect, U.S. households have seen $7 trillion of net worth vanish over the last five quarters. That makes the dot.com bubble tech-wreck of 2.8 trillion look like peanuts.

An overwhelming number of homeowners dipped into their home equity between 2001 and 2004, totaling $330 billion. Even worse, lenders continued to lend at dangerously high combined loan-to-value (CLTV) ratios right up to the tip of the bubble burst. Household net worth is imploding and in relation to disposable income, decreased to 529.3% in third quarter from 549.3% in second quarter.

The problem with these numbers is that the average homeowner’s assets are falling faster than their liabilities. Many of these homeowners either purchased or refinanced late in the game during the two year spike when prices were spiraling out of control, and they were allowed to buy a home or refinance 100% of the loan. Hello – you only need a slight decline in pricing to put these borrowers under water. When you don’t have to shell out any of your own clams, it’s easy to just walk away when the home loses half its value.

Tapping into your home equity for an emergency (a new roof or to help pay for college) is one thing, but Americans got a little greedy. They bought expensive toys like boats and Jags, built huge swimming pools and hot tubs – they used their homes like a revolving bank account. The American dream was all about owning your own home, not borrowing off of it whenever it appreciated a few bucks.

The homeowner’s equity data from the Fed’s Flow of Funds report shows that the average homeowner’s net equity is 43%. But when you deduct the 33% of homeowners (those who own homes free and clear with 100% equity) from the equation, you get a much lower number. The reason homeowners who don’t have a mortgage should not be included in the report is because it skews the numbers to make them look better. That’s not the reality. Those homeowners can’t default. We can’t grasp the whole real estate market problem unless we look only at mortgaged properties.

So it’s more reasonable and accurate to say that homeowners who carry a mortgage have less than 15% equity in their homes. And, with prices still dropping, that 15% will shrink even more.

Looking back at the 1950s, homeowner’s equity was in excess of 80%. Why? Because that generation, like their parents and grandparents, were taught to save, not spend. Second-generation Baby Boomers and Generation X were taught to spend now & pay later, enchanted by the banking industry with all those shiny credit card offers and 100% home loans. And somewhere along the way, we learned to buy more than we could afford.


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