Equity, ownership are not the same
The Color Of Money
08/27/2010 7:02 PM
08/28/2010 12:56 AM
I have my own spin to put on the news that sales of existing homes plunged 27 percent in July: Stop thinking of your home as your cash cow.
In the past several decades, borrowers have heavily leveraged themselves using their houses to buy the things they've wanted — cars, vacations, college educations, better kitchens or bathrooms.
That's one of the advantages of entering into a mortgage for a home, using it as loan collateral.
But an estimated one in seven homeowners now has a home worth less than what he or she owes on the mortgage, and nearly 5 million need their home prices to rebound by 25 percent before they are back above water, according to "State of the Nation's Housing," a report released earlier this summer by the Joint Center for Housing Studies of Harvard University.
With the rise in foreclosures and the decline in housing sales, we should be recalculating how homeownership fits into our net worth and, more importantly, how we look at homeownership.
How much of our housing wealth is net wealth?
Housing wealth is a large component of total family wealth, according to the most recent data compiled in the Federal Reserve's Survey of Consumer Finances. In 2007, the primary residence accounted for 31.8 percent of total family assets.
You calculate your net worth by adding up the value of all your assets and then deducting all your liabilities. With a house, you deduct the amount you owe on your mortgage from the approximate fair market value of the property. By the strict definition of net worth, if your home's estimated market value is more than what you have in the bank, then you have equity. That equity is considered an asset.
During one of my recent financial talks, I asked all the homeowners to stand. In the room of a few hundred, about 40 percent of the people rose. Then I asked how many of those standing had a mortgage on their home. If they did, I asked them to sit down.
Only a few people were left standing.
If you have a mortgage, home equity loan or line of credit on your home, you are not really a homeowner, and we should stop deceiving ourselves that we are.
In the spring, the Federal Reserve began collecting information for the 2010 Survey of Consumer Finances. The data will show what Americans own, from houses and cars to stocks and bonds. Summary results for the 2010 study will be published in early 2012.
Families have gone through a lot since the last consumer survey in 2007. I'd like to see the Federal Reserve explore how housing wealth is affecting families, taking into account the erosion of paper equity on their homes.
The National Association of Realtors' report on home sales is alarming. Seasonally adjusted existing-home sales are at the lowest level since the association began collecting such data in 1999. Single-family sales are at the lowest level since May 1995.
"Given that home values are back in line relative to income ... there is not likely to be any measurable change in home prices going forward," said Lawrence Yun, the NAR's chief economist, in releasing the July figures.
Of course, the association has put a positive spin on the slumping housing sales. Yun optimistically says: "Given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs."
When the state of the housing market improves, we need to resist going back to our old way of playing down a home as a liability. The latest home sales figures are further evidence that the so-called equity in your home isn't a sure thing on your personal balance sheet.
This should be one of the great lessons from the economic downturn.
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