What equity loss really means

The equity loss has not been distributed throughout the country at the same levels. We know that some areas the houses both appreciated and depreciated annually in the double digits. In these areas building equity just meant holding onto the home for a year. In other parts of the country that had only moderate property value increases mortgages had to be paid down to build equity.

In most parts of the country buying at peak or putting zero down there is a good chance there is not equity. During the Great Housing Bubble lenders were allowing upto 120% equity withdrawal on a property. If you pulled out 20% more than your house was worth you are already underwater - and there is no equity left. In the Washington Post there is an interesting article about equity losses not being felt evenly. First we take a look at the big picture -

To no one's surprise, home-equity holdings on a national basis got creamed during the past year. Homeowners lost an estimated $879.6 billion in net equity wealth -- that's the difference between the current market values of their houses and their current mortgage debt. In the first quarter of this year alone, estimated national equity losses totaled $399.1 billion.

Americans' equity in their homes represented just 46.2 percent of their properties' market values during the first quarter of this year. Put another way, total mortgage debt exceeded owners' equity and constituted almost 54 percent of total home values.

The Fed's estimate of a nearly $880 billion loss of home equity wealth may strike you as shocking, but look at that number with some recent perspective. During the housing boom years, nearly $3 trillion in net equity was racked up in a few years as prices exploded in local markets with high levels of speculative investments powered in part by low interest rates and funny-money mortgages.

But on a more regional level this is what it means -

The losses are highly concentrated. "The Fed's [equity decline] numbers for the country as a whole are really being dragged down disproportionately by the big drops in prices in California, Florida and a handful of other states," [Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association] said. "Most markets haven't been hit anywhere near as hard."

...
Five-year data from OFHEO suggest that is correct. Houses in Naples, Fla., lost 18.7 percent last year, but are still up a net 61 percent over the past five years. In Riverside-San Bernadino, Calif., houses lost 13.8 percent last year, but are still up by a net 71.5 percent since 2003. In metropolitan Washington, houses lost an average 5.1 percent last year, but have gained a net 68 percent over the past five years.

The gains and losses were not distributed evenly. The losses are hard and they have an impact. One huge impact is the massive changes in the loans lenders are willing to make. Easy credit, no doc loans, 100% financing are becoming a thing of the past. The smaller pool of buyers will also have an impact on the slower rise in property values - that is a simple law of supply and demand. Some of the equity people had is now gone - and areas like Merced, Calif. the equity is long, long gone. The best way to build equity will be the old fashioned way of paying off the mortgage and not extracting any equity through a HELOC.

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