Home equity report shows slump deepening

NEW YORK -- Nervous homeowners and economic analysts have been wondering how much worse the housing market could get. On Thursday they got an answer: Plenty.

Foreclosures are at a record high. Home equity is at a record low. The housing market is spiraling down with no end in sight and taking people's sense of economic security with it.

For the first time since the Federal Reserve started tracking the data in 1945, the amount of debt tied up in American homes now exceeds the equity homeowners have built.

The Fed reported Thursday homeowner equity actually slipped below 50 percent in the second quarter of last year, and fell to just below 48 percent in the fourth quarter.

And that was just one example in a day of dismal housing reports.

The Mortgage Bankers Association said foreclosures hit an all-time high in the final quarter of last year. And pending U.S. home sales -- those in the gap between when a buyer signs a contract and when the deal closes -- came in below analyst expectations for January and remained at the second-lowest reading on record.

"There is no sign that we're near the bottom in the housing market," said Douglas Elmendorf, a senior fellow at the Brookings Institution and former Fed economist. "Housing prices will probably fall for a year, two or three to come."

The trifecta of reports illustrates a housing market caught up in a "very negative, reinforcing downward spiral," said Mark Zandi, chief economist at Moody's Economy.com.

Home equity, the percentage of a home's market value minus mortgage-related debt, has steadily decreased even as home prices and homeownership rates jumped earlier this decade. That was due to an increase in cash-out refinancings, home equity loans and lines of credit and an increase in no-down-payment mortgages.

Now declining home prices are eating into equity, and economists expect the figure to drop even more.

Even for those who retain some equity, the effect on consumer sentiment and spending will be profound.

Homeowners, who once happily tapped home equity for expenditures and home improvements, may instead save money as they watch their total net worth wither. Those who are willing to spend their home equity will find lenders reluctant to give out home equity loans or lines of credit.

Last month, Congress passed a $168 billion economic stimulus package with provisions aimed at helping homeowners refinance into more affordable loans. The Federal Reserve has also slashed interest rates in hopes of spurring growth. On Tuesday, Fed Chairman Ben Bernanke suggested lenders reduce loan amounts to provide relief to beleaguered homeowners.

"At the end of the day, these efforts will be insufficient," Zandi said. "Policymakers will need to be more aggressive and put taxpayer money on the line to stem this. Ultimately, we will find a bottom, but it would be a mistake to let the market run its course."