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Thursday, March 6, 2008

Homeowner Equity Lowest Since End of WWII

The amount of equity Americans have in their homes fell below 50% for the first time since 1945, according to an AP Report on Yahoo. That was the first year the Fed began to track that data.

Per the report:

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 percent 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.

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. On Tuesday, Fed Chairman Ben Bernanke suggested lenders reduce loan amounts to provide relief to beleaguered homeowners.

While I'll be happy to take a reduction on the principle owed on my house, it feels like we are setting ourselves up for more issues in the future. "If I can't pay in the future, why can't I get help then too?" will be the call. The process that the government worked with lenders on to get people over to fixed rate loans was byzantine at best. A real system like that, but works makes more sense to me. If you cut the amount I owe and then the rate flips and I still can't afford it, all it did was to catch a write-off.

At the same time this is really starting to punish those that do want to pay. As all of the houses hit the market, on foreclosure, the overall property value goes down. So even if some one bought a house with 20% down and a 15-year loan, now the house is below the 80% threshold. Does he need PMI now?

A big mess, we need a cleanup on aisle two...stat.

(Photo from AP)


Fiscal Musings said...

It's a terrible indication about current conditions. However, I haven't heard of anyone that put 20% down and took out a 15-year that's having issues right now. Have you actually heard of this situation?

RacerX said...

Unfortunately yes! But in trouble in a slightly different way then sub-primers.

Say you bought a house in California for $500K and put $100k down (20%)ad get a 15-year loan. You have good credit, and get a 15-yr loan because you are responsible.

Now aome of your neighbor aren't and some even lose their house, or even worse walk away. Now the banks own them and try to flip them. even two houses in foreclosure near your can lower the value 25%! So you, through no fualt of your, own a house worth$375K and you have a $400K loan. You do not hold 20% of your value so you may now need PMI (I am not sure).

So if they try to move they own negative equity and it will cost them to sell there house. And if you don't have it...you own a house you can't live in do to say relocation, but you can't afford a new one since you are paying on the old one.

Big ripples from the stone!

Sharon said...

Yikes! I think we have to sink much lower before things are going to get better. What a mess!

minimum wage said...

Think of the good news:

Renter equity has never been higher!

RacerX said...

@Sharon - Unfortunately you are probably right. It will get worse before it gets better.

@minimum - You are right as well. There are a lot of rentals available as well. So much, in fact, that they are renting to those that walk away from their mortgage!

minimum wage said...

The bad news is that rents are soaring in Portland.

RacerX said...

That interesting given there are a ton of houses on the market!

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