Is home equity falling? 'Maybe, maybe not'
Posted
Mar 06 2008, 11:32 AM
by
Karen Datko
Rating:
Here are some stunning facts: The total value of homes owned in the U.S. has increased from $834 billion to $5.1 trillion, in inflation-adjusted dollars, since 1952. In the same time, home equity -- the portion people have paid off -- has increased from $672 billion to more than $2.5 trillion.
That sounds like great news. But it also means the average equity people have in their homes dropped from 80% of the home's value in those Howdy Doody days to a record low of 50.4%.
This information comes from Michael Rizzo, senior economist at the American Institute for Economic Research. "In short, the value of homes has increased greatly since 1952, but mortgage debt has increased even more," Rizzo writes at the institute's Web site.
So is this good news or bad news? Well, it all depends. In a post at his personal blog, The Unbroken Window, Rizzo asks, "Is home equity falling?" and answers, "Maybe, maybe not."
We contacted Rizzo with a couple of questions, and here's what he had to say: "I just wanted to point out that 60 years ago, homeowners (in aggregate) owned a large percentage of a small pie and while homeowners' share of the pie today is much smaller (leverage making up nearly half of housing values), the pie is substantially larger. Would you rather own 80% of $800 or so billion or 50% of $5 trillion? The point is to get people thinking."
Why the big dollar increases since 1952? The value of housing has gone up, the population is growing, and more of those people own houses, Rizzo writes in the AIER post.
Why is the equity percentage at a record low? "This largely reflects increased mortgage borrowing by homeowners, who have taken on larger debt to buy their homes and increasingly spent down their equity via home-equity loans," Rizzo writes.
Not everyone has mortgage debt. In fact, a third of homeowners own their homes free and clear. However, one in 10 owe more on their homes than the houses are worth, Rizzo says.
