Remember the Good Old Days? Way Back . . . let's say . . . 2006!
Home Equity Growth - practically guaranteed! 3%, 5%, 7% each year! Marching on!
Here in Chicago, in the North and Northwest Side Neighborhoods we serve with great frequency, average annual home appreciation between 2002 and 2006 was just over 4%. Declining home values here - not even a consideration!
But now?
The Standard & Poor's Chase-Shiller 20-City Composite, a national index measuring home values compared to a 2001 base index of 100, shows roughly a 33% decline from its 2006 peak.
Another measure, from the Federal Reserve Board, estimates the total Vallie of all real estate across the country has fallen from $21.9 Trillion at the end of December, 2006, to $17.9 Trillion as measured at the end of March, 2009 - a decline of roughly 18%. Parceled out for every adult across the U.S., that's about $13,000 per person!
Falling home prices, however, although the most talked about statistic, are only a part of the picture.
During the past three years, total outstanding mortgage loans rose from $9.9 Trillion to $10.5 Trillion- just over a 6% increase. As average prices decline, combined with higher average mortgage balances, the Perfect Storm was created for a home equity collapse.
Brett Arends, in a Wall Street Journal article from August 20th, graphs a real estate equity decline, based on Fed data, of about 40% from its peak in 2006.
Way back in 1955, when people longed to burn their mortgages, and many stayed in their homes forever, without periodic refinancing or drawing out equity for discretionary spending, home equity as a percent of home value exceeded 70%. As of March of this year, that equity percentage tumbled to 41.4%. That's the lowest percentage on record!
Even during the last prolonged slump in Real Estate - in the early 1990's, equity as a percent of home value fell only to the upper-50% range.
But here's the rub, according to Arends - today, in his opinion, even if average home prices recovered to their pre-bubble levels in 2006, the equity percentage versus value would still be only 52% or so!
Data from MoodysEconomy.com estimates that over 16 Million homeowners across the U.S. are underwater - in other words, they owe more on their home loans than its present market value. Even historically-real-estate-stable states such as Indiana have seen an incredible increase in those homeowners short on their value versus their outstanding mortgage balance.
The implication - even if home prices recover, the massive amounts of equity lost in this still-current Real Estate Downturn may not recover. Sellers will be able to draw less equity out to re-invest in a new, more expensive home. And buyers, no longer seeing their next home purchase as an automatic equity tree, might hesitate to pay too much.
So, indeed, as the market turns positive - and it will - many will find their lower levels of equity won't allow them to pull themselves up to the next housing level.
And that could impact upward movement on home prices down the line.
A scary thought, ehhh?
See our post today via BlogChicagoHomes.com.
DEAN MOSS & DEAN'S TEAM CHICAGO
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