Despite falling prices, most owners have equity

The Baltimore Sun

With the daily din of bad news about the state of the housing market, it's easy to lose sight of some larger economic realities: Despite declining prices in many markets, homeowners still control near-record equity holdings, just under $11 trillion.

In its latest quarterly "flow of funds" statistical report, the Federal Reserve calculated that American homeowners' equity accounts totaled $10.9 trillion by mid-2007. That was the net difference between total home mortgage debt ($10.1 trillion) and the total market value of home real estate (about $21 trillion).

The second-quarter equity number was down about $6 billion from the first quarter of the year, but was $48 billion higher than it was at the end of 2006. In other words, there's no question that equity holdings have declined this year and may well be lower when the Fed issues its next quarterly report in mid-December. But in an $11 trillion marketplace, a $6 billion giveback in a cyclical correction is not a cause for panic.

A similar, localized reality affects dozens of metropolitan housing markets that saw double-digit appreciation rates during the boom years. Prices are off - 4.4 percent on average among 20 major markets covered by the latest Standard & Poor's/Case-Shiller home price index. But if prices more than doubled as they did in 33 metropolitan markets between 2001 and 2006, according to federal estimates, even 10 percent and higher average price drops in once-booming areas of California and Florida have left owners with most of their paper gains intact.

Earlier this month in the Fort Myers area of southwest Florida, where average home prices jumped 130 percent between 2001 and 2006, a taxi driver told me that he bought a house for $234,000 four years ago and turned down an offer for $439,000 in early 2006. Now he figures he can't get more than $379,000 for it - a $60,000 drop in value in a year and a half. But he figures he's still ahead by $145,000 and has more than $150,000 in equity.

His estimates of gain may be optimistic - he didn't factor in his costs of ownership, such as mortgage payments, taxes, insurance, improvements and the like. But his basic conclusion is probably correct. Even with the price declines that have racked the area, he's well ahead.

Personal stories such as the taxi driver's are commonplace in many parts of the country, with two large exceptions: People who bought close to the peak of the boom - and thus weren't in the house long enough to reap advantages from double-digit appreciation - may now be in negative equity territory. Add to that homeowners in unemployment-ravaged communities, especially in the industrial Midwest, where foreclosures are pulling entire neighborhoods' house values down and destroying equity built up over years.

Many of these stories fill the news pages and cast a pall on consumers' perspectives on what's happening in housing. But tragic as they are, they are not the predominant reality in real estate across the country.

For the vast majority of owners, even in the formerly highest-flying areas, the giveback has been a modest fraction of the price gains of the previous five years.

Citing Case-Shiller index data, Brian Catalde, president of the National Association of Home Builders, says home prices in Los Angeles fell 5.7 percent in the past 12 months, but are up a net 88.9 percent since 2002. In Chicago, prices were down 1.3 percent between August 2006 and August 2007. But they were up a net 34.2 percent during the past five years.

Phoenix prices were down by 8 percent in 12 months, according to the Case-Shiller index, but were up by a net 80.2 percent between 2002 and 2007. And of course there are dozens of metropolitan home markets that never were touched by the boom's excesses, and have not seen price drops at all.

Examples include Dallas, where homes gained by an average of just 17.8 percent in value during the boom years of 2001 to 2006, according to the Office of Federal Housing Enterprise Oversight's home price index. From mid-2006 through mid-2007, Dallas house prices gained another 5 percent. Add in entire swaths of the country from the Pacific Northwest to parts of North Carolina, Tennessee, Utah and the Rocky Mountain states where house prices continue to gain moderately, and you begin to see the bigger national picture.

Bottom line: The housing price correction cycle continues in many - not all - parts of the country. It is sobering or painful for just about everybody except buyers. But in the absence of a recession or major capital markets crisis, the fact is that most homeowners' equity stakes are intact. Or even growing.

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