Got Equity?

House with FORECLOSURE sign on lawn, Spring, Texas, 8-22-06
AP (file)
As homeowners struggling to meet mortgage payments listened to President Bush's plan to help some stave off foreclosure and remain in their houses, the Federal Reserve came out with a report containing a new riveting statistic.

The nation's central bank says the amount of equity that U.S. homeowners hold in their homes slipped in the third quarter to the lowest level on record, just above 50 percent.

In its quarterly U.S. Flow of Funds Accounts, the central bank reported that homeowners' percentage of equity dipped to 50.4 percent from 51.1 percent from the previous quarter. On average, housing is Americans' single largest asset.

Economists expect this figure, equal to the percentage of a home's market value minus mortgage-related debt, to tumble even further as falling home prices eat into equity. It could easily drop below 50 percent by the end of next year, some experts say, marking the first time homeowners will owe more than they own since the Fed started recording the data in 1945.

Home equity has steadily decreased even as home prices jumped earlier this decade due to a surge in cash-out refinances, home equity loans and lines of credit and an increase in 100 percent or more home financing - practices which can in turn push borrowers closer to the risk of foreclosure.

Home foreclosures shot up to an all-time high in the third quarter, weighing in at 0.78 percent, while the delinquency rate for all mortgages climbed to 5.59 percent - the highest rate in 21 years.

The degree to which Americans own their homes is considered to be a matter of concern because a decline in equity could slow retail spending as homeowners stop tapping into their home equity to fund purchases and bills.

Consumer confidence is near a two-year low, attributed to housing problems, a credit crunch, high energy prices and turbulence on Wall Street.

The RBC Cash Index, released Thursday, shows consumer confidence clocking in at 65.9 in early December. That hovered close to a reading of 64 in November, which marked the worst showing since the devastation wrought by the Gulf Coast hurricanes in 2005.

"There's a great deal of angst out there," said economist Ken Mayland, president of ClearView Economics. "There is a great deal of fear and foreboding."

Over the past year, consumers' confidence has deteriorated sharply, reflecting the toll of the problems facing the economy. Last December, confidence stood at a solid 86.9. The index is based on the results of the international polling firm Ipsos.

Overall consumer sentiment remains at very low levels, said T.J. Marta, fixed income strategist at RBC Capital Markets. "Gasoline and oil prices are starting to slip but remain elevated. The stock market continues to struggle to make new highs. The housing situation remains dire."

The Federal Reserve is watching closely the way that consumers - a major force shaping overall economic activity - behave in terms of their spending and investing. The big worry among economists is that they will cut back sharply, throwing the economy into a recession.

Analysts say the odds of this happening have grown but economists, Fed officials and the Bush administration are still hopeful that such a situation can be avoided.

To stave off a possible recession, the Fed has sliced a key interest rate two times so far this year. A third rate reduction is expected when policymakers meet next week.