by Brian Brady
Commercial Real Estate Finance Expert
Structured Debt and Equity
Licensed Real Estate Broker in AL, CA, and FL
The Fed reported that home equity is at its lowest since World War Two:
Homeowners’ portion of equity slipped to downwardly revised 49.6 percent in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter — the third straight quarter it was under 50 percent.
That marks the first time homeowners’ debt on their houses exceeds their equity since the Fed started tracking the data in 1945.
The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.
Home equity, which is equal to the percentage of a home’s market value minus mortgage-related debt, has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100 percent or more home financing.
Perhaps this is the cause?
U.S. mortgage foreclosures rose to an all-time high at the end of 2007 as borrowers with adjustable-rate loans walked away from properties before their payments increased, the Mortgage Bankers Association said today.
New foreclosures jumped to 0.83 percent of all home loans in the fourth quarter from 0.54 percent a year earlier. Late payments rose to a 23-year high, the organization said in a report today.
“We’re seeing people give up even before they get to the reset because they couldn’t afford the home in the first place,” said Jay Brinkmann, vice president of research and economics for the Washington-based trade group.
The solution to the first problem? Let it happen. Banks will close. Wall Street will get hammered and the country will go into a recession. The best way to cure a hangover is sobriety, not a “hair of the dog that bit you”.
Thomas Johnson says:
Brian: When the foreclosures actually hit the bank balance sheets and leave the homeowner, the equity numbers will start to rise as new owners acquire the REO’s with cash downpayments. It will take years to recover from this devastation. To wit: in Houston, there are neighborhoods that took almost 20 years to regain 1980’s pricing. In the bubble markets, poorly conceived speculative euphoria projects will languish as the good stuff recovers and new product (5-10 years out) just passes it by.
I think the big differentiator 5-10 years out in new construction housing will be energy efficiency such as solar panels and water recovery technologies which will obsolete all but the most well located and planned neighborhoods which will have the underlying value to be retrofitted with the latest whizzbang technology.
March 6, 2008 — 1:39 pm
Brian Brady says:
“Brian: When the foreclosures actually hit the bank balance sheets and leave the homeowner, the equity numbers will start to rise as new owners acquire the REO’s with cash downpayments.”
Exactly. You eliminate the froth.
March 6, 2008 — 6:34 pm
Jeff Brown says:
It’s times like this when we find out who are the real ‘free market’ investors and who only talk about it. 🙂
The Piper will be paid — one way or the other.
March 6, 2008 — 7:24 pm
Robert Kerr says:
The solution to the first problem? Let it happen. Banks will close. Wall Street will get hammered and the country will go into a recession. The best way to cure a hangover is sobriety, not a “hair of the dog that bit you”.
Amen to that.
March 6, 2008 — 10:35 pm
Dave Shafer says:
Brian, the drop is home prices is directly related to the drop in home equity over the last year. Beyond that, the percentage of home equity has been dropping since WW II as far as I understand it. Meaning that people are able to buy houses with smaller and smaller down payments, which in my mind is a good thing.
Since the foreclosure rate is still less than 1%, those homes in foreclosure is really a secondary problem. As to variable rate loans leading to foreclosures, most studies point out that is a very minor issue. Still the same foreclosure issues, loss of income (generally job loss) is far and away the big issue, with sickness and divorce coming up behind.
RE Speculators does have some impact as they seem to make up to 18% of the foreclosures (percentage of non-owner occupied homes in foreclosure).
My sense is that we have been hit with a triple whammy, down cycle in real estate, historically high speculative re investment (all those seminars and books sent out alot of amatuers), and high LTV loans to folks with no concern for their past financial history.
Wall Street will recover. Some banks (Countrywide?) will declare bankruptcy or be bought out for pennies on the dollars, the rest will recover and be stronger for it. And the real estate markets will recover in direct proportion to availability of jobs in the area.
March 7, 2008 — 1:53 pm
Jeff Brown says:
Hey!! What that Dave guy said. 🙂
Exactly.
March 7, 2008 — 3:04 pm
Robert Kerr says:
Beyond that, the percentage of home equity has been dropping since WW II as far as I understand it.
Not true.
Since the foreclosure rate is still less than 1%
Also not true; it’s quite a bit higher, actually.
2.04% of all mortgages are in foreclosure right now: http://tinyurl.com/227m8e Factor in those already processed in ’07 and you’re up over 3%.
Factor in those at risk and in default right now and you’re looking at 5-5.5% of all mortgages. That’s enormous.
March 7, 2008 — 8:18 pm
Dave Shafer says:
Robert,
thanks for the correction with the actual foreclosure rate at 2%. As for your additive effect (old foreclosures and possible future foreclosures) you may be right, but I like to compare apples to apples and not apples to orange futures! Interestingly, the conforming loan foreclosure rate (that is what I track) still is less than 1%. Frankly, I don’t care what happens to the lenders and sub prime folks, but want to point out that even if the foreclosure rate for sub prime goes to 50% that is a success story since 100% of these folks have a history of not paying their bills!
As to the home equity percentage, the federal reserve press release stated that home equity has been on a slow but steady decrease since 1945. This was omitted in many of the media outlets for obvious reasons. So I will let you argue it out with the federal reserve. But this is how I remembered it from a couple of years ago.
I still stand by the original thought of the post, which is that home equity drops when the market value of homes drop and foreclosures are not large enough to affect it (especially since many of the foreclosures are in situations with no equity).
March 9, 2008 — 7:46 pm