Thursday, March 6, 2008

Home Equity < Home Debt

The recent decline in home values has left U.S. consumers with a sharp decline in home equity. According to the Federal Reserve Bank, home equity is less than 50 percent for the first time since the era of the Great Depression. Looking back, the Fed says home equity slipped below 50 percent in the second quarter of 2007 and continued to fall, ending the year less than 48 percent.

Another way of looking at this is that home debt is now greater than home equity. The average homeowner’s share of ownership in a house is less than they owe on its mortgage. Looking at it still another way, American homes now belong primarily to financial institutions rather than to individuals.

You might think all the fabulously rich people out there would bring the average up, but they don’t. Many multimillionaires owe millions on their homes, as we saw, for example, in the recent headlines about a possible foreclosure at Michael Jackson’s Neverland Ranch.

And so, as a nation, banks and lenders mostly own our homes. Picture the Mississippi River, and imagine that the financial institutions own the homes east of the Mississippi, while people own only the homes west of the Mississippi.

Yikes! It’s no wonder if American consumers are feeling a bit skittish lately. If we keep spending left and right, will we end up owning our homes or not?

It is not just a rhetorical question. Some experts think 15 million households will lose their homes before next year is over.

There are other problems putting pressure on homeowners at the same time. Higher energy prices mean that more money goes to heat and cool a home. The financial crisis means that homeowners can’t count on getting a new mortgage if something goes wrong. Some homeowners are realizing they can’t afford to move — until they accumulate more home equity, they’re stuck where they are.

It’s part of a larger picture of an economy showing signs of cracks. It’s a sobering situation for consumers. Now performing without a safety net, we know we’d better get it right. And that helps to explain why the consumer-spending boom that had kept the U.S. economy limping forward for the past five years has come to a sudden stop.