Home Equity Diminishing

Homeowners began to lose hold of their homes long 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 50.4 percent in the third quarter of this year, down from 62 percent at the end of 1990, according to the Federal Reserve, even as the average home value surged 139 percent during that period.

But the recent drop in average value is particularly bad news for homeowners who treated their homes as piggy banks instead of as savings accounts.  Nationwide, they drained $468.7 billion out of their homes in 2004 through home equity loans or cash-out refinancings, according to a report from former Federal Reserve Chairman Alan Greenspan and Fed senior economist James Kennedy.  Fifty-eight percent of that cash went to home improvements and personal spending, while 27 percent paid off credit card debt.