Monday, June 11, 2007

Mortgage debt keeps growing

The Fed’s first quarter Flow of Funds release, published last week, showed that mortgage debt keeps rising, even as home prices decline and financing is getting harder to find. Mortgage debt increased at a 5.4% annual rate in the first quarter, nearly three times as fast as house appreciation for the same period. Equity is declining, and at the end of Q1 2007, the ratio of equity to home value was at the record low of 52.7%. In today’s market, you don’t have to take a “cash-out” refinance to reduce the equity in your house. As prices drop, you essentially owe a larger percentage of your home’s value – without increasing your loan amount. In 2000, the equity-to-home-value ratio was 57.9, and has been steadily declining ever since. Economists predict that this ratio may drop below 50 for the first time ever in the coming months.

The drop in home equity is a logical consequence of loose lending standards during the boom years, when anyone could “buy” a house with little to no money down and hope that it would appreciate as home prices kept rising. Now that prices are flat or dropping nearly everywhere, and borrowers face monthly payments adjusting upwards, they’re being left with less and less equity in their homes. Excessive greed made owners refinance repeatedly during the boom years, draining cash out of their houses. Today, consumer confidence and spending are falling, raising concerns that the “housing slump” will affect the broader economy quite badly. Keep your fingers crossed.

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