‘CAN VANISHED REAL ESTATE WEALTH RETURN?,’ from the Wall St. Journal, via

In Uncategorized on August 26, 2009 at 10:18

Everyone talks about house price averages. But how much actual wealth have American households lost in the real estate crash? (And what, if anything, does this mean for you and your money?)

The story on the indices is mixed. The Standard & Poor’s Case-Shiller 20 City Composite is down about a third from its peak three years ago. Inevitably this generates a lot of the buzz. But Case-Shiller is weighted towards big cities, including Los Angeles, Las Vegas and Miami, where declines have been severe. Other sources believe the average decline nationwide has been much more modest.

The Federal Reserve, using a variety of sources, has its own estimate of real estate values and publishes these quarterly.

From the end of 2006 through March 31, it says, the total market value of U.S. household real estate fell from $21.9 trillion to $17.9 trillion. That’s about 18%. (The lost wealth works out at just over $13,000 for every person in the country.)

But although house prices get all the attention, they are only half the story.

During the same period of time, total outstanding mortgage lending rose from $9.9 trillion to $10.5 trillion.

Homeowners’ equity collapsed. Even if we take the Fed’s conservative estimates for the decline in house prices, that equity has fallen about 40% from the peak.

The chart at left tells the story. It is based on Federal Reserve data, and shows the equity homeowners have left in their homes.

As of March 31, owners’ equity accounted for just 41.4% of real estate values. The levels are the lowest on record, and of course they are far below those which were standard a generation ago.

This is a major difference with the last real estate bust, in the early 1990s, and it’s why historical comparisons can be so dangerous. In the late 1990s, when the last slump was tapering off, home equity levels stayed in the high fifties.

To put this in context: Given current mortgage levels, even if a miracle happened, and home prices recovered all the way back up to their peak 2006 bubble levels the average equity rate would still only be 52%., the real estate data company, estimates 13.5 million single-family homes in America are now in negative equity — in other words, the property is worth less than the mortgage(s). That’s 23% of those homes with mortgages. Moody’s puts the numbers even higher, at around 16 million.

And it’s not just the well-known disaster zones like Las Vegas, Florida and parts of California. says 20% of Texan homes are underwater on their mortgage, and 21% of those in Indiana.

What does this mean?

Maybe home prices have stopped collapsing (although it would be a bold bet to say this for certain). But the picture on home equity is yet another reason to be skeptical that we will see a big, sustained bounce soon. Many potential sellers have a desperately weak hand. And many potential buyers lack enough equity in their current home to trade up.

It is also another reason to be cautious about prospects for an economic recovery. Homeowners can’t tap their equity to spend. Instead they are likely to be paying down their debts. There is now some debate about how powerful the housing “wealth effect” really is. But most economists agree that rising house prices helped drive at least some consumer spending. And the collapse in equity can hardly be positive.

Wall Street has turned more bullish recently on consumer discretionary stocks. Many have retraced their losses during the financial crisis. It will be interesting to see whether this has been too much, too soon.


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