Homeownership rises, but equity falls
NEW YORK -- Homeowners started losing hold of their homes years before spiking foreclosures and the housing slump slammed the economy.
Piece by piece, some gave away their homes by tapping equity to take cash out to pay for cars, weddings and vacations. Others never owned one brick.
During the country's most recent housing boom, the term "homeowner" became a misnomer as lenders offered 100 percent or more home financing to some buyers.
Now, slipping home prices threaten to further erode the value of many Americans' single largest asset, curbing consumer spending and jeopardizing retirement assets.
Thanks in large part to mortgage-related tax deductions and a drumbeat of advice that everyone should own their home, the U.S. homeownership rate rose steadily in recent decades. It peaked at 69.2 percent in 2004 before backing down to 68.2 percent at the end of the third quarter, according to the Census Bureau, which has collected the data since 1965.
But that small decline masks a much larger plunge in the amount of equity homeowners hold. This figure, equal to the percentage of a home's market value minus mortgage-related debt, fell to an average of 51.7 percent at the end of the second quarter, down from 62 percent at the end of 1990, the Federal Reserve reported, even as the average home value surged 139 percent during that period.
Some economists believe the home equity number will drop below 50 percent by the end of next year, marking the first time homeowners will owe more than they own since the Fed started recording the data in 1945.
"Although homes increased hugely in value, homeowners were borrowing against them as fast if not faster than the appreciation," said Dean Baker, co-director for the Center for Economic and Policy Research. "And when people were buying new homes, they were getting them with as a little as 5 percent, 2 percent down, even nothing at all."
Thirteen percent of first mortgages originated in 2005 and 2006 had down payments of less than 10 percent, according to the Mortgage Bankers Association. Another 1 percent of the mortgages surpassed the value of the property.
A recent report from online real-estate information company Zillow Inc. showed home values declining 5.7 percent year-over-year in 83 metropolitan areas. A 20 percent down payment would have provided a cushion from these price declines.
The drop in average value is particularly bad news for homeowners who treated their homes as piggy banks instead of as savings accounts. They drained $468.7 billion out of their homes in 2004 through home equity loans or cash-out refinancing, according to a report this year from former Fed Chairman Alan Greenspan and Fed senior economist James Kennedy. Fifty-eight percent of that cash went to home improvements and personal spending, while another 27 percent paid off credit card debt.
They felt confident housing prices would continue to rise, replenishing the equity they took out.
"To deal with your single biggest asset like that is risky," said Jim Gaines, research economist at The Real Estate Center at Texas A&M University. "Those things should be paid for by current earnings, not savings, which is what your house is."
For other homeowners who took equity out, what remains is scant. Thirty percent of the home equity loans issued in 2005 and 2006 left homeowners with less than 10 percent of equity in their homes, the MBA said. Another 3 percent now owe more than the value of the house.
A home equity loan is another close-ended loan on top of a mortgage, whereas an equity line of credit is an open-ended loan. Both use houses as collateral. A homeowner can also refinance for more than what is owed on the current mortgage and pocket the difference.
No type of national bailout will replace lost equity. Those who depended on it will have to rely on meager savings and other investments. Younger homeowners have more time to replenish the equity. But for Baby Boomers who took out cash from their homes every time home prices went up, their retirement income may not cut it.