ANOTHER ASPECT OF HOUSEHOLD DEBT

As people began taking on more debt during the Bush regime, they also borrowed against their homes, sometimes heavily. Now that home prices are falling, more than a few owe more than their houses are worth and some of them are facing foreclosure.

Bill Coming Due on Sinking Home Equity
Dec 5 02:34 PM US/Eastern
By J.W. ELPHINSTONE
AP Business Writer

NEW YORK (AP) - 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 cash out to pay for cars, weddings and vacations.

...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 51.7 percent at the end of the second quarter, down from 62 percent at the end of 1990, the Federal Reserve reported, even as the average home value surged 139 percent during that period.

Some economists believe the home equity number will drop below 50 percent 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.


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

Dropping home prices also threatens retail spending as the equity well runs dry. Homeowners won't be able to tap equity as easily for big- ticket purchases and may put more toward saving than spending as housing values fall.

The long-term ramifications could be worse. As prices continue to decline or remain flat, homeowners' total net worth could be wrecked, especially for those who sucked money out of their homes.

Residential real estate represented 39 percent of a household's total assets in 2004, according to the Fed, whereas retirement accounts made up 11.4 percent and stocks just 6.3 percent.

No type of national bailout will replace that lost equity.