2008 March 06 Thursday
Average Home Equity Less Than Half Amount Owed

Warren Buffett, once more richest man in the world, refers to America as Squanderville because we are going deeper and deeper in debt to other parts of the world (Thriftville). In another sign of our road to Squanderville Americans now own less than half the market value of their houses.

Homeowners' percentage of equity slipped to a revised lower 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.

Total equity in American houses equals less than 1 year of GDP. I'm surprised by this. I would have expected a much larger figure for housing worth as compared to GDP.

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.

Blogger Calculated Risk points out that since almost a third of all homes have no mortgage the remaining homes probably have about 29.7% equity on average.

According to the Census Bureau, 31.8% of all U.S. owner occupied homes had no mortgage in 2006 (most recent data).


Assuming 74.2% of total assets is for households with mortgages ($14,954.8 billion), and since all of the mortgage debt ($10,508.8 billion) is from the households with mortgages, these homes have an average of 29.7% equity.

Why does this matter? It tells us how far housing prices would have to fall before most mortgaged houses become worth less than the money owed on them.

Providence Equity Partners chief executive Jonathan Nelson says another 5% decline in housing prices will put 30% of homeowners owing more on their houses than their houses are worth.

"In real estate, house prices fell 7pc in 2007 so 13pc of mortgage holders were underwater. 2008 has already seen those falls rise to 10pc and if it falls a further 5pc, which is not impossible, 30pc of homeowners in the US are under water and have negative equity. So it's hard to see how the third pillar - confidence - can hold up."

Even if you are not a home owner or a holder of a mortgage security you could end up paying for some of these losses via taxes used to bail out failed banks.

Personal worths are declining as housing prices and stock prices fall.

Based on the current pattern of stock market losses and falling home values, household net worth is estimated to have declined by about $1 trillion in the fourth quarter and about $1.5 trillion to $2 trillion this quarter, depending on where stock prices settle. That would be the largest drop since the tech bubble burst in 2000.

How long will the recession last and how deep will it get?

Home prices are falling steeply. Adjusted for inflation the declines would be even larger.

U.S. home values in 2007 posted the first yearly decline in 16 years, according to two home-price indexes released Tuesday, and analysts said more price drops are still in the offing.

Home prices fell 8.9% in 2007, the largest decline in the Case-Shiller home price index in at least 20 years, Standard & Poor's reported Tuesday.

Ben Bernanke, the chairman of the Fed, sees a serious problem in the negative equity positions in mortgages.

"The current housing difficulties differ from those in the past, largely because of the pervasiveness of negative equity positions," Mr. Bernanke told the Independent Community Bankers of America in Orlando yesterday. With negative equity, which means a home is worth less than its mortgage, "a stressed borrower has less ability…and less financial incentive to try to remain in the home. In this environment, principal reductions that restore some equity for the homeowner may be a relatively more effective means of avoiding delinquency and foreclosure than reducing the interest rate."

But for wannabe house buyers a big collapse in housing prices would provide great buying opportunities - at least for those who manage to avoid unemployment.

People are losing their houses even before their mortgages reset.

About 40 percent of all foreclosures are homeowners with prime or subprime loans who couldn't make their payments before the reset, Brinkmann estimated in an interview. Another 23 percent are borrowers who received some form of loan modification, typically a freezing or a reduction of their rate, and then default, he said

The foreclosure rate has hit a 36+ year record.

Over 900,000 households are in the foreclosure process, up 71% from a year ago, according to a survey by the Mortgage Bankers Association. That figure represents 2.04% of all mortgages, the highest rate in the report's quarterly, 36-year history.

America needs to stop running a huge trade deficit and Americans need to produce goods rather than try to get rich using debt to purchase unproductive assets. The bursting of this housing bubble ought to serve as a wake-up that pyramid schemes are not the road to greater wealth for entire societies.

Share |      By Randall Parker at 2008 March 06 09:57 PM  Economics Housing

HellKaiserRyo said at March 7, 2008 1:00 AM:

You seem to be against socialism Randall... I actually think it would make people happier. Take way peoples disposible income via taxes and transfer it to the less fortunate in the form of services such as universal health care would prevent most people from buying Veblen goods. This would prevent a feedback cycle of debt where most people wastefully buy positional goods.

averros said at March 7, 2008 2:40 AM:

HellKaiserRyo... you need a re-education tour to North Korea. Preferably without return ticket. There you'd learn about the merits of socialism.

I'm amazed how many people are totally functionally illiterate, to the point of believing, against the mountains of the evidence to the contrary, that socialism is somehow good.

anon said at March 7, 2008 3:14 AM:

Americans need to produce goods rather than try to get rich using debt to purchase unproductive assets.

I think you're being misleading here: housing and commercial real-estate are hardly unproductive assets. It just happens that much of their value comes from the valuation of land, which cannot increase in supply and is thus prone to speculative excesses which check real, productive use.

The bursting of this housing bubble ought to serve as a wake-up that pyramid schemes are not the road to greater wealth for entire societies.

It has been known for a long time that the real-estate sector is prone to boom-bust cycles, unfortunately the required policy responses are quite radical. The clearest wake up call was sounded in 1997 (!) and it made zero difference.

Kenelm Digby said at March 7, 2008 3:14 AM:

...and the funny thing is that China will probably emerge from this whole debacle even stronger, as it hoovers up bombed out US assets at bargain basin prices.
But of course the 'clever' people at the Economist and WSJ keep telling us that 'globalization' 'benefits us all'.

Kenelm Digby said at March 7, 2008 3:16 AM:

Why pick on North Korea?, How about 'Bangladesh' as a poster-boy for free markets?

HellKaiserRyo said at March 7, 2008 6:57 AM:

I prefer Sweden... at least if I am unemployed I can go to labor market political activities

dchamil said at March 7, 2008 7:58 AM:

Averros, although socialism has done badly as an economic system, it has been quite successful as a road to political power. The myths of socialism have a continuing appeal, e.g., 'The evil rich are responsible for my poverty.' For the elites who seek political power, it hardly matters whether an ideology has some basis in fact, whether it's socialism or global warming. The only thing that is important is that it follow the road to political power, which goes like this:

Something is terribly, terribly wrong.
In order to avert disaster, you must give me political power.
And don't think it will be cheap.

Raus said at March 7, 2008 8:42 AM:

"I prefer Sweden... at least if I am unemployed I can go to labor market political activities."

Another lesson for you about socialism. Socialism "worked" best in Scandinavia because it was full of white scandinavians. Now that it is getting all kind of wonderful brown people who have fucked up religions, low IQs and violent/degenerate behavior it is on the way out. I guess it was fun while it lasted.

kurt9 said at March 7, 2008 8:54 AM:

I do not see how anyone today can still believe in socialism. Socialism is simply where the productive are parasitized by the non-productive. It is probably the most discredited ideology in history at this point in time. Call it s**t for brains.

Ned said at March 7, 2008 12:15 PM:

I have a friend who lives in Germany and is an astute observer of the European political scene. He says that European socialists can be divided into two categories: those who know socialism doesn't work but cynically promote it for their own advancement; and those who believe that if they just tinker with it a little more it will finally come together and start functioning properly. I leave it to you to decide which group is more disgusting.

Wolf-Dog said at March 7, 2008 12:47 PM:

One problem is that the lower 50 % of the population cannot compete with the upper 50%. This means that in a free market economy, the lower 50 % will gradually lose their net worth to the upper 50 %. When they say that the "average" equity has declined, this does not change the fact that they equity of the upper 10 % has not increased exponentially. In fact, the equity "lost" by the lower 90 % went to the upper 10 %. Even before the Federal Reserve was created and long before the U.S. had significant federal taxes, there were boom and bust phases in the economy.

Randall Parker said at March 7, 2008 5:33 PM:


Why does the welfare state cause less damage in Sweden than in the United States? Because Swedes are smart, not very corrupt, and feel obligations to each other. Our lower class (e.g. most blacks) lack the needed ingredients.

This is why the Old South in the US is so deeply opposed to the welfare state. Whereas Vermont's residents and Minnesota's residents do not see the welfare state as causing so much damage. The demographics determine the extent of the damage.

Well, the demographics of the US are shifting in a direction that makes the welfare state much more damaging.

As for redistribution and health care: The US marketplace funds and generates the biomedical advances that the Swedes and other European welfare states use to treat their populaces. Without the marketplace of America the socialist medical systems would have a lot less in the way of diagnostic tools and treatments.

Randall Parker said at March 7, 2008 5:48 PM:


How about pseudonym that allows you to be distinguished from other anon posters?

Productive assets: You won't see Warren Buffett buying houses as productive assets. They do not generate wealth the way, say, an IT system for insurance claims or a factory for medical equipment or a lab for product design produces wealth.

Bob Badour said at March 7, 2008 6:27 PM:

He's actually more likely to buy a factory for making bricks than any of those.

Randall Parker said at March 7, 2008 6:52 PM:


Kenelm Digby makes an excellent point: Markets have failed to produce great prosperity in some parts of the world even in the absence of much socialism. Markets only bring great success if the needed intellectual capital is there.

kurt9 said at March 9, 2008 2:01 PM:

The reason why socialism does not work and is definitionally incapable of working is because it is based on the efficacy of bureaucracy. All large-scale, top-down social structures are bureaucratic and, therefor, dysfunctional in nature. This is based on human nature and is a law of nature. Nothing can change this. Thus any political ideology based on the efficacy of large scale social institutions, such as the liberal-left and conservatism that is separate and distinct from libertarianism, are intellectually bankrupt and cannot possibly accomplish anything of value.

Positive value and accomplishment can only come about via the efforts of free individuals working in decentralized networks of bottom-up organizations based on sponanteous self-order. All of my personal experiences since I was a child have confirmed this reality, that all large scale social institutions are dysfunctional in nature and, therefor, have no positive value.

I think it hilarious that many people, especially from the right, claim that we libertarians do not recognize fundamental human nature. I claim that the opposite is in fact the truth. The fact that we libertarians recognize human nature enough to realize that all large scale social institutions are dysfunctional bureaucracies and are completely worthless for any kind of productive accomplishment that clearly shows that we have a far better understanding of human nature and that it is our detractors, not us, who are completely deluded about human nature.

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