Home prices still feel like they’re going up (in NYC, anyway), but so do mortgages. Are we richer or poorer?
Okay, I cheated and I asked myself a question, mainly because I found an Oliver Ryan story (from Fortune magazine on September 20, 2004) that argued that we were cannibalizing all the equity in our homes, and I wondered if it were still true.
I’m no economist, so I decided to use some easy Federal Reserve numbers, from the Flow of Funds report, table B.100, which gives you the balance sheet of households (and includes home equity lines of credit).
According to the Fed, at the end of 2000, home mortgages totalled $4.8 trillion, and our homes were collectively worth $11.4 trillion — which meant that we had a collective 58% equity, 42% debt.
At the end of the first quarter of 2007, home mortgages totalled $9.8 trillion, and our homes were collectively worth $20.8 trillion — which meant we had a collective 53% equity, 47% debt.
So yes, we are still slowly draining the equity out of our homes. If current trends continue, in another 7 years, the glass/house will be more than half-empty. In other words, the percentage of debt on those homes will be more than 50%.
If you’ve just bought a house and put down 5%, 10%, or 20%, you may think “so what, 50% equity looks pretty good to me!” but it’s a disturbing trend. The payments we make on those mortgages include interest costs, money that we should be using to educate our kids and start new businesses.