Friday, May 15, 2009

The Great Disappearing Equity

From our last post we can see that equity has been vanishing in our region. The house we thought was worth $500,000 (and some of paid that much for it) is now worth maybe $400,000. So when we saw a depiction of our wealth disappearing we had to post it -

No, no, no, not that one this one -

Our mortgage debt is increasing while our equity is disappearing. It is not magic - rather market manipulation and economic carelessness. Here is the post from Business Insider titled Our Vanishing Home Equity. Let's take a look at the post -

Everyone knows that U.S. house prices have fallen almost 30% from the peak. What is less well known is that Americans' equity in those houses--the part that American homeowners actually own--has fallen much further. Why? Because, despite all the foreclosures and write-offs, our total mortgage debt has only dropped slightly from its peak.

When value falls and debt stays the same, equity gets crushed (See The Problem With Debt). If house prices end up falling more than 40% peak to trough, which seems likely, U.S. homeowner equity will drop more than 70% and as many as half of American mortgage holders will be underwater.

For most consumers, one's house is one's biggest source of wealth. Economists have demonstrated that a loss of wealth leads to cuts in spending--from psychology and necessity. A 50%+ drop in home equity is one whopping-big loss of wealth. And it will have a lasting impact on consumer spending.

Even after prices stabilize things will not improve. This will take crisis will take a long time to recover as we can see from this chart -

We still have a long way to go...

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