Federal Reserve: Household Equity at all time lows

The
Fed just released the Balance Sheet of Households for 2007 Q4.

It shows home owners equity as a percentage of household real estate at 47.9%, the lowest on record. Going back 20+ years, this number was as high as 68.2% in 1986.

In other words, for the first time ever, banks/lender own
more of the houses in America than the folks who live there do.

And, that’s at current household prices. If the recent downward price acceleration gets any worse, we are going to see an even lower number. Moody’s Economy.com estimates that 8.8 million homeowners — about 10.3% percent
of all U.S. homes — will have zero or negative equity by the end of this month.  Another 10-15 million households are at risk of becoming "upside
down" if prices continue falling.

Here’s what Jim Walker of Asianomics had to say last month:

"Essentially, US house prices – on average – are down 10% on the year. The "on average" proviso is important. In New York and the Bay Area house prices are either up or flat. In some parts of the US – southern California, Nevada, Florida – the drop in house prices is in the region of 30-50%. This puts a lot of American’s in negative equity.

RJ McCreary of Kelusa Capital sent me a few charts on US home values assuming a 90% loan-to-value ratio. In one, he estimated where we were in negative equity terms on different scenarios of falling home prices using November data. The chart shows the date at which the average home owner is under water given the fall in house prices so far – and then another 5, 10, and 15% drop. Anyone who has bought a house since late 2005 is now in negative equity (remember, this is assuming a conservative 10% deposit on the purchase).

That’s ugly. Here’s the referenced chart:
>

Us_home_prices
Chart via RJ McCreary of Kelusa Capital

>

Now for the real rub — the reality is actually worse than the chart above.

Why?

Mortgage Equity Withdrawal (MEW) by
existing home owners. You have seen our numbers in the past on MEW — an ungodly amount of equity was converted into GDP — cash withdrawals were spent on cars, renovations, vacations. This was all at the expense of Equity.

Now, we  see via the Fed that not only was this an artificial prop to GDP, there was a real cost to it — Household Equity is below 50%. This is unprecedented in American economic history.

We do indeed live in interesting times . . .

>

>

Previously:

Why the Real Estate Slow Down Matters So Much
Wednesday, June 21, 2006 | 08:26 AM
http://bigpicture.typepad.com/comments/2006/06/why_the_real_es.html

More on Mortgage Equity Withdrawals and Consumer Spending
Tuesday, April 24, 2007
http://bigpicture.typepad.com/comments/2007/04/more_on_equity_.html

Sources:
Flow of Funds Accounts of the United States
FEDERAL RESERVE statistical release March 6, 2008
http://www.federalreserve.gov/releases/z1/Current/z1.pdf

Americans poorer than a year ago; Household net worth falls 3.6% in 4th quarter
Rex Nutting
MarketWatch, 12:14 p.m. EST March 6, 2008
http://tinyurl.com/2w4zxv

Manic markets, US home prices
Jim Walker
Asionomics, 27 February 2008
http://www.asianom.com/

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What's been said:

Discussions found on the web:
  1. Will commented on Mar 6

    Put your heads between your legs and kiss your ass good-bye.

    I’m on the edge of my seat to see how long the markets remain in denial.

  2. mappo commented on Mar 6

    Zactly – MEW is the real cancer in the system. Homeowners that bought before the bubble and should therefore have plenty of equity to weather its collapse are all screwed too. They all gutted their equity as prices rose and are now sitting on the same huge debts as the bubble buyers.

  3. MarkTX commented on Mar 6

    “We do indeed live in interesting times . . .”

    Should that read (for now/future generations)

    We do indeed live in “Borrowed” times……

  4. Chief Tomahawk commented on Mar 6

    Whoa!

    Last half hour of trading and who does CNBC drag out?

    Charlie G!!!!!

  5. Pat G. commented on Mar 6

    In essence then this run up in the GDP and stocks has all been a ruse. Any governmental intervention in the mortgage markets to stop the bleeding will simply put an artificial floor under it. The DOW and S&P should be at half their current levels.

  6. B.B. commented on Mar 6

    Gimme a B
    Gimme a O
    Gimme a T
    Gimme a T
    Gimme a O
    Gimme a M
    What’s That SPELL!
    Could this be Goldilocks coming back home, all dolled up and shaking her ass? Buy her a drink, sailor? She’s HOT!. She’s ready. Fly her to the moon.
    Posted by: cinefoz | Feb 22, 2008 4:00:58 PM

    Is the Cinefoz still around? his posts have gotten fewer. To his credit, even though he was making this swing bottom call, there was a bit of a rally.

  7. Matt commented on Mar 6

    I know people that are cashing in 401(k)s to postpone losing their house and to pay for gas to get to work. If that trend continues, the housing decline mess WILL spill over to equities in a major way.
    I so want to be optimistic here but this is getting scary…
    Does anyone have stats for IRA/401(k) redemptions?

  8. Ben commented on Mar 6

    – Thursday selloff won’t last!

    – On today’s selloff, where’s the volume?

    – Bears look tired!

  9. Estragon commented on Mar 6

    Citi reducing mortgage portfolio by $45MM by not cutting new loans. Talk about closing the barn door. Sheesh.

  10. glory commented on Mar 6

    an oldie, but a goodie…

    http://www.satirewire.com/news/0106/dream.shtml

    RECORD 75 MILLION AMERICANS NOW
    PRETENDING THEY OWN THEIR OWN HOMES
    Low Interest Rates Help Many Fulfill The American (Banker’s) Dream

    Minneapolis, Minn. (SatireWire.com) — Showing no ill effects from a weak economy, housing numbers released by the National Association of Realtors today showed that a record 75 million Americans are now participating in the mass self-delusion that they, and not their banks, actually own their homes…

  11. Mr. Obvious commented on Mar 6

    cinefoz said that he got bored with our negativity…

    I’m still waiting to hear how housing is going to “normalize” in the next two months….

  12. Ross commented on Mar 6

    I think cinefoz went down with his dinghy load. Nothing ventured, nothing gained.

    The used to be an interesting stat from the Conference Board titled ‘mortgage debt for non real estate purposes.’ Back in the late 60’s thru the late 70’s it was running 5 to 7%. Hate to think where it is now.

    The housing bust will no doubt sober people back to the realization that a house is what you live in, not an asset class to be toyed with.

    I don’t suppose for an instant that things will return to its former state but a little stabilization would be helpful.

    My poor old Papa paid off his house in 1990. Look at all the fun he missed.

  13. Francois commented on Mar 6

    “In other words, for the first time ever, banks/lender own more of the houses in America than the folks who live there do.”

    Owning the means of production AND the capital. Komrade Gospodine Marx vould be bery proud. Da Plan is vorking.

  14. DonKei commented on Mar 6

    I’m buying the DOW when it hits 10,000, again. No really, I think that’ll be the bottom. Okay, maybe I’ll wait ’til 8,000. No, maybe 5,000.

    Oh what the hell, I’m never buying another promise from another sheister ever. That goes even for muni-bonds.

    Keep your eyes peeled for the impending bankruptcy of my little county (Jefferson, in Alabama). It will be the largest muni bankruptcy in US history (about $3.2b in sewer bonds alone, $4.6b total). Talk about your negative, shit-sloppy equity.

    It shouldn’t be long–maybe even by this weekend. Is there any way to short shit?

  15. Pool Shark commented on Mar 6

    Sung to the tune of “Tomorrow” from the musical “Annie”

    Our budget should be elastic
    never pay with cash when you have plastic

    I’ll borrow, I’ll borrow,
    I’ll mortgage tomorrow,
    and pay back another day

    (Courtesy of the Capitol Steps)

  16. Darkness commented on Mar 6

    You know what the problem is? Equity. Look at that word; it looks so solid sitting there. But I said to the partner, so 49.x% of equity in the U.S. is held by homeowners. So, what is OUR equity. Therein lies the rub. How the heck do you figure it out. I know how much we owe own the mortgage… but what’s the house worth? That’s a darn slippery number to be used to compute something as stationary sounding as “Equity”.

    Should I use the purchase price from 12 years ago? (68%) or the ZESTimate ™! (81%) or what? I’d need something like an equity clock to keep running tabs on the thing in the second case. Equity is an illusion until you cash out and one lonely buyer determines what it was all along. I can’t even determine it for my house, how in the world can they determine it for the country?

  17. kk commented on Mar 6

    Feels like the RTC era all over again. The fear is almost off the charts.

  18. zot23 commented on Mar 6

    You can try this for property values in your hood.

    http://www.zillow.com

    Not guaranteed accurate, but it’s a cute use of google earth.

    Welcome to the ownership society. Too bad we didn’t ask who the new owners were going to be. I hope they like pets.

  19. LLL commented on Mar 6

    So here I sit with a pile of cash. No seriously made a few in the markets. Where do I put this money, well up into 3 to 7 figures.

    I can get cash and burn it. Got enough gold/silver/platinum/Corn/oil/gov bonds/muni’s to hold me a while.
    For years foreign markets were a good investment, now that is looking doggey.

    What is person to do now. I’m seriously thinking about averaging into the US market
    indexes.

    I also might buy a Chalet in Switzerland, serious. But I am really confused.

  20. LLL commented on Mar 6

    So here I sit with a pile of cash. No seriously made a few in the markets. Where do I put this money, well up into 3 to 7 figures.

    I can get cash and burn it. Got enough gold/silver/platinum/Corn/oil/gov bonds/muni’s to hold me a while.
    For years foreign markets were a good investment, now that is looking doggey.

    What is person to do now. I’m seriously thinking about averaging into the US market
    indexes.

    I also might buy a Chalet in Switzerland, serious. But I am really confused.

  21. Ross commented on Mar 6

    LLL,
    Cash ain’t trash.

    If you do buy a Chalet in der Sweitz get one with a hay meadow and some cows. Seriously, farmland has yet to be priced off the charts. Use a little leverage (50%) and sharecrop it. I bet it will cash flow positive and double in value within 5 years.

    I remember a friend who had 1,000 acres in Minn. The land values went from $200/acre to $1,000/acre between 71 and 78.

    This commodity cycle has many years to play out. Don’t believe those that tell you it’s a bubble. They only say that because they don’t own any…………..yet.

  22. larster commented on Mar 6

    For Matt’s question on 401k withdrawals- Fidelity recently announced that 17% of their 401k accounts have borrowed against the account.

  23. Lars commented on Mar 6

    Much home equity is now in the form of SUVs, big screen TVs, lavish vacations and other indulgences purchased with HELOCs.

  24. Ben commented on Mar 6

    LLL,

    Buying a Chalet in Switzerland while the dollar index sitting at or near all time low. U are sooooooo cute!

    :P

  25. PeterR commented on Mar 6

    Well, er, did anyone notice that the chart is on the verge of going positive?

  26. Bud commented on Mar 6

    Glad my house and car is paid-off in full. Less things to worry about.

  27. Pat G. commented on Mar 6

    LLL-“What is person to do now.” I’d suggest paying down any debt, if you have any. I’d suggest paying down things you’ll need in the future (i.e. funeral expenses). I know that it sounds morbid but it works.

    Ross-“This commodity cycle has many years to play out. Don’t believe those that tell you it’s a bubble. They only say that because they don’t own any…………..yet.” Priceless!!

    Bud-“Glad my house and car is paid-off in full. Less things to worry about.” I couldn’t agree with you more.

  28. Bob A commented on Mar 6

    “Goldilocks is not dead yet”
    Larry Kudlow March 6, 2008

  29. ef commented on Mar 6

    Pretty much corresponds to map in USA Today’s New. It’s crummy if you are in California, Nevada, Michigan, Florida, Arizona. So why didn’t the state leadership/legislation do some preemptive prevention? The more I read about this story, the more the housing mania seems really localized, but exploited by WS. Is the root cause of all our aches and pains really WS? It’s like one of those pharmaceuticals we read about. They advertise it as solving a problem, everyone is buzzing about it, you take it, feel good for a short time, and then find out it is going to kill you. At which time the lawyers step in. ;-)

  30. Matt commented on Mar 6

    For Matt’s question on 401k withdrawals- Fidelity recently announced that 17% of their 401k accounts have borrowed against the account.

    Is this an increase – Let’s see an historical chart of early pension withdrawls, redemptions and borrowing and see if we can see something in this data.

    The goal is to see how much actual “equity” we have left to spend. Since consumers have what 80% of GDP, in that range – The Housing ATM is out of service, Real wages flat and worsening, I believe Credit Cards are maxed out, so with a negative savings rate, where does the difference come from – will have to be stocks and bonds. How much do we have? And don’t say the value of the stock market because most of it is held by institutions and foreigners. Its basically a brn rate that I am trying to get at. How much money do Americans have left now that their biggest asset is in shambles?

  31. Matt commented on Mar 6

    For Matt’s question on 401k withdrawals- Fidelity recently announced that 17% of their 401k accounts have borrowed against the account.

    Is this an increase – Let’s see an historical chart of early pension withdrawls, redemptions and borrowing and see if we can see something in this data.

    The goal is to see how much actual “equity” we have left to spend. Since consumers have what 80% of GDP, in that range – The Housing ATM is out of service, Real wages flat and worsening, I believe Credit Cards are maxed out, so with a negative savings rate, where does the difference come from – will have to be stocks and bonds. How much do we have? And don’t say the value of the stock market because most of it is held by institutions and foreigners. Its basically a brn rate that I am trying to get at. How much money do Americans have left now that their biggest asset is in shambles?

  32. Ross commented on Mar 6

    Damn,
    Listening to Kudlie this evening. Guess I didn’t get enough punishment today. Anyway, Joe Battapaglia is starting to get it. He is a good guy and one of the few that has overcome his year 2000 dementia. Re-establishing credibility is a humbling experience. I know first hand.

    Glad to have the big guy on board.

    Hmmm lets see now. The S&P is lower than the peak in 2000 and the dollar has been trashed. We’ve have the flation and the stag part seems to be occuring. 1974 REDUX?

  33. SPECTRE of Deflation commented on Mar 6

    I wish there was more good news to print. We are up to our eyeballs in debt which we collectively called money because housing always goes up until it doesn’t. What’s more, the pigs decided that they needed to become hogs. We now have the most billionaires while our economy was sacrificed to get us to this spectacular place and time.

    Please tell me who is supposed to lead us to the promised land?

  34. mtpockets commented on Mar 6

    Roses are red,
    Violets are blue,
    Your ARM just reset,
    and the payment is DUE.

    Approximately 30% of all homes do not have any mortgage which askews the chart provided above.

    I have no debt, counsel those who are in financial trouble, and plan to purchase a house within 3 weeks. It will be paid for with cash and for 65 cents on the dollar. Why be normal? If I decide to lease it out, the return will be approximately 13% cash on cash.

    One mans folly is another mans opportuity.

  35. Pat G. commented on Mar 6

    “Please tell me who is supposed to lead us to the promised land?”

    Hopefully God, eventually.

  36. Winston Munn commented on Mar 6

    The good news, brothers and sisters, is that the crumbling housing market will not – I repeat – WILL NOT affect the bonuses of Wamu execs.

    Quote: “NEW YORK (Reuters) – Washington Mutual Inc’s board of directors approved a plan which helps protect its management’s bonus targets from the impact of the subprime loan fallout, according to a filing with U.S. regulators.

    The board’s human resources committee on February 26 approved bonus targets, some of which will be calculated to exclude expenses related to business re-sizing or restructuring, foreclosed real estate assets and loan loss provisions other than related to its credit card business.” End Quote.

    And boss, I’d like this week’s paycheck to “exclude” the time I lost from work when Dr. Snyder restructured my coronary arteries, and those 2 weeks I lost earlier this year when Pete “The Nose” foreclosed on my Laker’s bet and left me with two broken loan-loss provisions, and a downsized consciousness. And when my wife’s re-sizing gets done, how about I put in a voucher to cover that cost, too?

  37. Winston Munn commented on Mar 6

    Fortunately, Fannie Mae has developed a foolproof plan to save underwater homeowners. The Fannie Mae PIK Plan.

    FNM 10-K, page 79:
    Quote: “For example, we recently introduced a new HomeSaver Advance ™ initiative, which is a loss mitigation tool that we began implementing in the first quarter of 2008. HomeSaver Advance provides qualified borrowers with an unsecured personal loan in an amount equal to all past due payments relating to their mortgage loan, allowing borrowers to cure their payment defaults under mortgage loans without requiring modification of their mortgage loans.” End Quote.

    Instead of Payment In Kind (PIK), I think a better desctiption would be Paper Utilized as Keynesian Equity. (PUKE)

    I don’t know whether to laugh or crye, PIK or PUKE.

  38. phil commented on Mar 6

    A little over 10 yrs ago 2nd mortgages were still illegal in Texas. Somebody obviously had some sense at one time to ever pass such a law. Opening them up to Joe Sixpack was about as intelligent as legalizing murder.

  39. David commented on Mar 6

    Barry, my dad said that his generation saw the depression in his youth and our generation will see the depression in our later years. I’m beginning to wonder how true my dad was; and to all who live to see such times. But that is not for us to decide, all we have to decide is what to do with the time that is given to us.
    The worse is yet to come.

    “O, call back yesterday, bid time return.”
    William Shakespeare

  40. SPECTRE of Deflation commented on Mar 7

    Pat G, absolutely. I was talking about mere mortals who might lead us out of this situation. We are all the way back to 1945 with housing:

    NEW YORK (AP) — Americans’ percentage of equity in their homes fell below 50 percent for the first time on record since 1945, the Federal Reserve said Thursday.

    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.

  41. Dave commented on Mar 7

    This is largely a function of elderly people, having paid off their mortgages, going into debt again to invest. In the past when the mortgage was burned that was that.

    20 years ago no one heard of a reverse morgage.

  42. Condo Hotels commented on Mar 11

    Aagghh! The markets are going down quick. It’s sad but true. It’s shocking to see such a drop in home equity. Where did we go wrong?? Ah yes….lending, lending, lending….

  43. Waye F. commented on May 10

    It is obvious to see now at least in hind sight that interest rates were artificially lowered 2004-2006 for the sole purpose of having homeowners withdraw their equity. The equity was inturn used as the money pump for the U.S. economy/GDP. Yes, this was a false feel good, spend now worry later time of consumer consumption.