Home equity falls below 50% for first time on record
— -- Home equity for the average American has dropped below 50% 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 market value minus mortgage balance — fell to 47.9% 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% for the last nine months of 2007.
The drop below 50% 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 USA's sputtering economy, up a paltry rate of 0.6% in the last quarter.
As the "wealth effect" powered consumer spending across the economy during the housing boom, declining home equity fosters consumer caution.
Economy.com estimates that by the end of March, 8.8 million homeowners, about 10% 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.
Related Stories
ABC News Live