Federal Reserve: Household Equity at All Time Lows

by: Barry Ritholtz

The Fed just released the Balance Sheet of Households for 2007 Q4.

It shows home owners equity as a percentage of household real estate at 47.9%, the lowest on record. Going back 20+ years, this number was as high as 68.2% in 1986.

In other words, for the first time ever, banks/lenders own more of the houses in America than the folks who live there do.

And, that's at current household prices. If the recent downward price acceleration gets any worse, we are going to see an even lower number.

Moody's Economy.com estimates that 8.8 million homeowners -- about 10.3% percent of all U.S. homes -- will have zero or negative equity by the end of this month. Another 10-15 million households are at risk of becoming "upside down" if prices continue falling.

Here's what Jim Walker of Asianomics had to say last month:

"Essentially, US house prices - on average - are down 10% on the year. The "on average" proviso is important. In New York and the Bay Area house prices are either up or flat. In some parts of the US - southern California, Nevada, Florida - the drop in house prices is in the region of 30-50%. This puts a lot of Americans in negative equity.

RJ McCreary of Kelusa Capital sent me a few charts on US home values assuming a 90% loan-to-value ratio. In one, he estimated where we were in negative equity terms on different scenarios of falling home prices using November data. The chart shows the date at which the average home owner is under water given the fall in house prices so far - and then another 5, 10, and 15% drop. Anyone who has bought a house since late 2005 is now in negative equity (remember, this is assuming a conservative 10% deposit on the purchase)."

That's ugly. Here's the referenced chart:

Chart via RJ McCreary of Kelusa Capital

Now for the real rub -- the reality is actually worse than the chart above.


Mortgage Equity Withdrawal [MEW] by existing home owners. You have seen our numbers in the past on MEW -- an ungodly amount of equity was converted into GDP -- cash withdrawals were spent on cars, renovations, vacations. This was all at the expense of Equity.

Now, we see via the Fed that not only was this an artificial prop to GDP, there was a real cost to it -- Household Equity is below 50%. This is unprecedented in American economic history.

We do indeed live in interesting times...


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Wednesday, June 21, 2006 | 08:26 AM

More on Mortgage Equity Withdrawals and Consumer Spending
Tuesday, April 24, 2007

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FEDERAL RESERVE statistical release March 6, 2008

Americans poorer than a year ago; Household net worth falls 3.6% in 4th quarter
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MarketWatch, 12:14 p.m. EST March 6, 2008

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Jim Walker
Asionomics, 27 February 2008