This chart shows the steady decline in homeowners’ equity since 1980. One of the more distrubing aspects of this chart is how homeowners’ equity during the housing bubble did not increase. Given the massive run up in home prices during the bubble years you would have expected to see an increase in homeowners’ equity. This was not the case. Why? First, because many existing homeowners were withdrawing equity with the use of home equity loans. Second, many first-time homebuyers were using no-money down loans and other creative financing to purchase their first home. The combination of these two trends lead to no significant increase in homeowners’ equity even as home prices soared in the bubble years. This was a setup for greater declines in homeowners’ equity once the housing bubble burst. As you can clearly see from this chart, homeowners’ equity has fallen off a cliff in recent years as the housing bubble burst.
Data Sources:
Various historical U.S. Federal Reserve Flow of Funds reports.
Nice work.
Are these primary residences or include 2nd and 3rd homes.
Is it possible that homeowners are withdrawing equity to diversify i.e. put equity to work in other investments - home improvements, other real estate, children’s education, stocks or businesses etc. and not just clothes, vacations, auto’s etc.
Comment by Senta — April 28, 2009 @ 7:40 am
Excellent questions. The data includes primary residences,and 2nd and 3rd homes that are not rented (also vacant land is included). Some of the equity that has been withdrawn is absolutely going to things like stocks, education, home improvements, paying down other debts (and not just vacations). The money put into stocks (until just recently) has been a bad investment so far. I don’t have recent data on this, however, I did a report back in 2005 that shows the uses of home equity withdrawals (see Chart #3 in the report). Here is a link: http://chartingtheeconomy.com/?p=82. The most disturbing thing to me is the negative trend in home equity over such a long period of time.
Comment by admin — April 28, 2009 @ 8:07 am
Withdrawal of equity to invest in other assets may be a rational response. For example it makes sense to pay off non-deductible loans with home equity as mortgage interest is deductible in the US. Public policy in the US heavily favours home ownership. This is not true in Canada (where I live) so it would be interesting to compare if behavior is different.
Comment by Senta — April 28, 2009 @ 6:44 pm
Here is a Canadian chart which appears to suggest that most money withdrawn finds its way back into home renovations.
http://www.bankofcanada.ca/en/speeches/2008/slide9_230608.pdf
Comment by Senta — April 28, 2009 @ 6:49 pm
Thanks for the chart. I like to see data from other countries.
Comment by admin — April 28, 2009 @ 7:15 pm
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