Housing Market In Disrepair
Americans' percentage of equity in their homes fell below 50 percent for the first time on record in the final quarter of last year while home foreclosures soared to an all-time high, according to a pair of reports released Thursday.
The news underscored the suffering of distressed U.S. homeowners and the growing danger the housing meltdown poses for the economy.
Homeowners' portion of equity slipped to a downwardly revised 49.6 percent in the second quarter of 2007, the central bank reported in its quarterly U.S. Flow of Funds Accounts, and declined further to 47.9 percent in the fourth quarter - the third straight quarter it was under 50 percent.
That marks the first time homeowners' debt on their houses exceeds their equity since the Fed started tracking the data in 1945.
The total value of equity also fell for the third straight quarter to $9.65 trillion from a downwardly revised $9.93 trillion in the third quarter.
Home equity, which is equal to the percentage of a home's market value minus mortgage-related debt, 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.
Economists expect this figure to drop even further as declining home prices eat into the value of most Americans' single largest asset.
Moody's Economy.com estimates that 8.8 million homeowners, or about 10.3 percent of homes, will have zero or negative equity by the end of the month. Even more disturbing, about 13.8 million households, or 15.9 percent, will be "upside down" if prices fall 20 percent from their peak.
The latest Standard & Poor's/Case-Shiller index showed U.S. home prices plunging 8.9 percent in the final quarter of 2007 compared with a year ago, the steepest decline in the 20-year history of the index.
A report from the Mortgage Bankers Association on Thursday said that home foreclosures skyrocketed to an all-time high in the final quarter of last year. The proportion of all mortgages nationwide that fell into foreclosure surged to a record of 0.83 percent, while the percentage of adjustable-rate mortgages to borrowers with risky credit that entered the foreclosure process soared to a record of 5.29 percent.
Experts expect foreclosures to rise as more homeowners struggle with adjusting rates on their mortgages, making their monthly payments unaffordable. Problems in the credit markets and eroding home values are making it harder to refinance out of unmanageable loans.
The threat of so-called "mortgage walkers," or homeowners who can afford their payments but decide not to pay, also increases as home values depreciate and equity diminishes. Banks and credit-rating agencies already are seeing early evidence of this.
On Tuesday, Fed Chairman Ben Bernanke suggested lenders reduce loan amounts to provide relief to beleaguered homeowners.
While the Bush administration has no plans to do more to address the situation, CBS News correspondent Anthony Mason reports that Congressman Barney Frank, head of the Financial Services Committee, will introduce legislation next week to help lenders who agree to reduce the principal on delinquent loans for borrowers who could then afford to pay.
"If you insist on not doing anything at all to help them, they're not the only ones who will suffer. The whole economy will," Frank said.
In Minnesota, legislators aren't waiting for outside help, reports Mason. They've introduced legislation to require lenders to defer foreclosures on subprime loans for a year.
The worsening foreclosure and late payment figures come as fears grow that the country is teetering on the edge of a recession or in one already.
The wave of foreclosures threatens to deepen the already severely depressed housing market. The homes people are forced out of add to the big glut of unsold homes already on the market. That forces even more cutbacks by homebuilders, taking a big bite out of national economic activity. Harder-to-get credit, meanwhile, has thwarted would-be home buyers, aggravating problems in the housing market.
Homeowners with spotty credit histories or low incomes who took out higher-risk subprime adjustable-rate mortgages have suffered the most distress as the housing market went from boom to bust. Initially low interest rates that reset to much higher rates have clobbered these borrowers. With home values dragged down by the slump, many borrowers were left with mortgages that eclipsed the value of their homes.
"Declining home prices are clearly the driving factor behind foreclosures, but the reasons and magnitude of the declines differ from state to state," Duncan said.