Tuesday, October 21, 2008

The American Dream of Home Debtorship

Pretty interesting article that talks about how Americans traded the dream of home ownership for the nightmare of home debtorship.

Fed Report Shows Americans Have Less Home Equity Than Ever Before.

Jun 05, 2008

Falling prices are eroding the value of U.S. homes. According to a new Fed report, the equity that Americans have in their homes has dropped to the lowest level on record.


Home equity is defined as the market value of a property minus the amount owed on mortgage debts.

Since homes are the biggest asset that most people have, equity is pretty important. Unfortunately for the American people, home equity is a dwindling resource.

A Federal Reserve report released Thursday shows the amount of equity held by U.S. homeowners slid to 46.2 percent in the first quarter of 2008--the lowest percent on record.

Equity has been on the decline since the housing boom. Although home prices were rising at the time, there were a lot of homeowners who took advantage of lines of credit and cash-out loans.

Mortgage debt rose to historic proportions during this period and is still rising despite the presence of a full-blown credit crunch. During the first quarter of 2008, Americans' mortgage debt increased from $10.53 trillion to $10.6 trillion.

Underwater Mortgage

Rising debt and vanishing equity has contributed to an underwater mortgage phenomenon.

An estimated 16 percent of people with mortgages have little to no home equity left, according to Moody's Economy.com. By 2009, one in four mortgage holders will owe more on their home than it is worth.


Source: Zillow.com

Homeowners with new mortgages are suffering the worst. At the beginning of 2008, 39 percent of the people who bought a home in 2006 were underwater in their mortgage. Thirty percent of those who bought in 2007 were in the same predicament.


Source: Zillow.com

Negative equity rates are highest in bubblicious states like Nevada, California, Florida, and Arizona. A whopping 77 percent of the people who bought a home in Stockton, California in 2007 owe more on their home than it is worth today.

In many of these cases, negative equity problems can be traced back to the origination of the mortgage. Between 2006 and 2008, median down payments were between zero and 5 percent in boom states like California.

A lot of buyers (and lenders) gambled on the market, thinking that home prices would continue to rise--despite all evidence to the contrary. The conditions that we are seeing now are a direct result of their follies.

Source: Homeguide123

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