The Nation's Housing

What We Own Vs. What We Owe

By Kenneth R. Harney
Saturday, February 25, 2006

Billowing appreciation rates have been the hot news in real estate for much of the past three years. But now, with many of the most effervescent local markets calming, the focus is turning to something much more fundamental: homeowners' equity stakes.

How big is your home-equity cushion? How much more is your home worth compared with the debt you've loaded onto it -- primarily your first and second mortgages and credit lines? Do you have a 20 percent equity stake? Less than 10 percent?

The popular image is that America's homeowners are turning into debt junkies, hocking their houses to the hilt and banking on double-digit appreciation rates to bail them out. But a new analysis of home equity holdings nationwide suggests that the reality is much more nuanced. On the one hand, it is true that a surprisingly large percentage of recent home buyers have minimal, even negative, equity levels. On the other hand, most homeowners have substantial net equity holdings -- $11 trillion, almost double what they had just five years ago.

The study tapped into proprietary mortgage and real estate valuation databases maintained by subsidiaries of Santa Ana, Calif.,-based First American Corp., a title insurance, credit and settlement services company. Christopher L. Cagan, director of research and analytics for First American Real Estate Solutions, was the primary investigator. The data included appraisal or valuation information on 26 million homes in 36 states and the District of Columbia as of September, and data on nearly 20 million active mortgages originated in 2004 and 2005.

Some of the findings appear to support the stretched-to-the-limit, debt-binging picture critics paint of today's homeowners and borrowers. Among 2004-05 borrowers:

· Nearly 1 in 10 was in a zero or negative equity position. Five percent were in negative territory by more than 10 percent; that is, their combined mortgage debts exceeded their home values by more than 10 percent.

· Nearly 30 percent had equity cushions of less than 20 percent. Forty-four percent had less than a 30 percent cushion.

· State-by-state net equity holdings were sobering in some cases. More than 28 percent of Colorado buyers or refinancers had less than 5 percent equity in their properties. Nearly 24 percent of Ohio owners were in the same situation, as were 13 percent in the District and around 11 percent in California and Florida.

Equity levels are important measures of household financial health and a key component of net worth. Low equity makes owners more vulnerable to economic shocks and rising interest rates. If these owners had to sell in a pinch, they could find themselves walking away with little or nothing at the end of the transaction. If property values declined even modestly, large numbers of recent buyers with minimal equity stakes could slip to the negative side.

But overall, the state of the nation's home equity holdings is hardly so dire. The First American study cites Federal Reserve research findings that contrary to some critics' assumptions, most U.S. homeowners have plenty of equity -- 57 percent stakes on average. Five years earlier, the figure was almost the same, 58 percent.

Not surprisingly, households' equity positions vary by the age of their mortgages. Eight in 10 people who took out their mortgages in 1985 have equity stakes of 75 percent to 80 percent, because of price inflation and paying down principal. Sixty-five percent of borrowers whose loans date to 1990 have 50 percent to 55 percent equity positions. Roughly half of 2001 buyers and refinancers have equity stakes grow of 25 to 30 percent.

In contrast, the most recent borrowers tend to be thin on equity because of high housing prices, low down payments, "piggyback" second loan programs, plus widespread use of interest-only and "payment option" plans that cut monthly payments significantly but may add to principal debt. Nearly 30 percent of 2005's borrowers have zero to negative 5 percent equity positions. Some -- but not large numbers -- of those low-equity homeowners who face hefty payment "resets" on interest-only and negative-amortization loans in the coming two to three years will end up in hot water, Cagan said.

But most will not. And need not. The upshot: If you've got a low-equity mortgage that's heading for a reset, plan ahead now. Make sure you have a financial action strategy to handle what's coming. Why risk the equity you already have, plus the equity you're almost certain to accumulate in the future?

Kenneth R. Harney's e-mail address

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