Homeowner’s Equity Hits Historic Low

By the end of the first quarter of 2008, almost 8.5 million Americans had little to no equity remaining in their home, totaling over 15% of all homeowners and sinking to levels not seen since 1945.  As home values continue to decline, analysts expect this number to reach 25% of all homeowners by the end of 2009.  The report marked the fifth consecutive time in which homeowner equity measured below 50%.  And while the amount of homeowner equity dropped to a little over $9 trillion, conversely the amount of mortgage debt offsetting equity rose to over $10.5 trillion. 

Home prices have declined to levels seen at the end of 2004 and on average prices have fallen roughly 24% from their highs in many areas severely afflicted by the real estate bubble. Thus housing experts anticipate in the months to come that home prices will continue declining even further, as the economy weakens, causing even more equity to disappear from American’s homes.  Homeowner equity is defined as the market value of a property, based on current comparable sales in the area and then subtracting the total amount of liens (including mortgages and any other recorded liens against the property) from the estimated market value.  Aside from falling home prices and declining property values, many homeowners acquired properties with a smaller equity position going in when they purchased the home by contributing little to nothing towards the down payment on the loan.   Also, many existing homeowners had run up substantial home equity loans and lines of credit secured against their properties in order to make a wide range of consumer purchases.  As incomes have been stagnant to declining over the course of the past decade, many consumers have tapped into their home equity, which had been rising at a record pace until recently, in order to live.  Essentially, Americans had been using debt in lieu of earnings to maintain their lifestyle.   Now that home prices are declining, when other expenses are rising (i.e. fuel and food), consumers are seeing their biggest asset, their home, drop in value and their own net worth falling right along with it just as their disposable income is quickly shrinking. 

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