Homeowners' equity fading away

By The Associated Press

Homeowners started losing hold of their homes years before spiking foreclosures and the housing slump slammed the economy.

Piece by piece, some gave away their homes by tapping equity to take out cash to pay for cars, weddings or vacations. Others never owned a single brick.

During the country's most recent housing boom, the term "homeowner" became a misnomer as lenders offered 125% home financing to some buyers.

Now, slipping home prices threaten to further erode the value of many Americans' largest asset, curbing consumer spending and jeopardizing retirements.

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Thanks in large part to mortgage-related tax deductions and a drumbeat of advice that everyone should own a home, the U.S. homeownership rate had risen steadily in recent decades. It peaked at 69.2% in 2004 before backing down to 68.2% at the end of this year's 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% at the end of the third quarter, down from 62% at the end of 1990, even as the average home value surged, the Federal Reserve reported.

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Some economists believe the home-equity number will drop below 50% by the end of next year, marking the first time homeowners will owe more than they own since the Fed started recording the data in 1945.

Lots of small down payments

"Although homes increased hugely in value, homeowners were borrowing against them as fast, if not faster, than the appreciation," said Dean Baker, the co-director of the Center for Economic and Policy Research. "And when people were buying new homes, they were getting them with as a little as 5%, 2% down, even nothing at all."

About 13% of first mortgages originated in 2005 and 2006 had down payments of less than 10%, according to the Mortgage Bankers Association. An additional 1% of the mortgages surpassed the value of the property.

"How much people put down on the home has always been an important variable for the performance of a loan," said Thomas Lawler, a former official at mortgage lender Fannie Mae who is now a private housing and finance consultant.

"Mortgage lenders lost sight of its importance because most of the loan-level data they used came from the latter 1990s to the early 2000s, when very few places in the country weren't seeing house appreciation," he said.

A recent report from Seattle online real-estate-information company Zillow showed home values declining 5.7% year over year in 83 metropolitan areas. A 20% down payment would have provided a cushion from these price declines.

The drop in average value is particularly bad news for homeowners who treated their homes as piggy banks instead of as savings accounts.

Hundreds of billions siphoned off

They drained $468.7 billion out of their homes in 2004 through home-equity loans or cash-out refinancings, according to a report this year from former Fed Chairman Alan Greenspan and Fed senior economist James Kennedy.

About 58% of that cash went to home improvements and personal spending; an additional 27% paid off credit card debt.

Continued: A cautionary tale

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