Federal Reserve: Household Equity at All Time Lows

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.

Why?

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...

Previously:

Why the Real Estate Slow Down Matters So Much
Wednesday, June 21, 2006 | 08:26 AM

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

Sources:
Flow of Funds Accounts of the United States
FEDERAL RESERVE statistical release March 6, 2008
http://www.federalreserve.gov/releases/z1/Current/z1.pdf

Americans poorer than a year ago; Household net worth falls 3.6% in 4th quarter
Rex Nutting
MarketWatch, 12:14 p.m. EST March 6, 2008
http://tinyurl.com/2w4zxv

Manic markets, US home prices
Jim Walker
Asionomics, 27 February 2008
http://www.asianom.com/

Comments

[Malkiel:]

With all of the new lending options that came onto the market in the last 10 years--easy refinancing for home equity withdrawal and reverse mortgages for the aging populalation--we would have been creeping toward this anyway, even if housing prices had just hit a ceiling rather than collapsed. This decline is also related to the decline in American savings, reported last year as having fallen below 0% for the first time last year (though those figures exclude investments, making them less dire, but the trend is still there)...

2008 Mar 07 11:26 AM

[Johnny Bitc...:]

I would presume it is also related to the tax advantage of the mortgage interest reduction.

If the govt. is going to subsidize your mortgage it makes perfect sense to have your house as leveraged as possible at all times to maximize the tax deduction. For those with alot of equity it will pay to releverage every so often and place the proceeds in a money market account.

The only real complication occurs when interest rate differentials are large from existing loan to refi loan, but presumably this is partly offset by keeping your equity in an interest bearing account instead of a house.

jbd.

2008 Mar 08 01:30 AM

[Paul S C:]

Johnny,

Remember me? We had a disagreement about a year ago over the long term merits of Hussman Strategic Growth (HSGFX) (see Hussman's "phase transition" article). I apologize for not posting a comment for the article above but I had promised to follow up with you in a year's time - as that's how long I thought it might take to properly evaluate HSGFX - and this was the only way I could think of. Perhaps now you will consider the fund and the friendly advice of strangers?

All the best,
Paul

2008 Sep 17 08:35 PM