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Home Equity at Lowest Rate Ever
Wednesday, June 18, 2008
The Federal Reserve Board released new data last week that showed that the ratio of homeowners' equity to the value of their home (in other words, the share of the home that the homeowner owns rather than the bank) fell to 46.2 percent in the first quarter of 2007, the lowest level ever. This ratio had never been below 50 percent until last year, and it was typically around 67 percent through the 50s, 60s, 70s, and 80s.
With much of the huge baby boom cohort near retirement, we might expect that the ratio of equity to value would be higher than its historic average, not lower. Of course, the average number conceals a great deal. Roughly one-third of homeowners own their house outright (they have paid off their mortgage). If the paid off houses cost as much as the average home (they actually cost somewhat less), then for the two-thirds of homeowners with mortgages, the average ratio of equity to value would be close to 20 percent.
But wait, it gets worse. The Fed's data is based on the Office of Federal Housing Enterprise Oversight's House Price Index. This index shows a substantially slower rate of house price decline than the more broadly constructed Case-Shiller index.
If we used the Case-Shiller index to measure the change in house prices since 2006, then the ratio of equity to value at the end of the first quarter would be close to 42 percent and the average ratio of equity to value for those with mortgages outstanding would be less than 14 percent. And of course prices are still falling.
This is really bad news for the tens of millions of baby boomers who were counting on the equity in their home to be a major source of support in their retirement. Of course the flip side is that all those folks who are still on the warpath to cut Social Security and Medicare are likely to get chased out of town. Tens of millions of hardworking people will now have desperate need of these programs to sustain a decent standard of living in retirement. These voters will look less kindly than ever on the politicians who try to take these benefits away.
By David Baker