The eleven-year Housing Bubble was the most dramatic and persistent period of housing appreciation in U.S. history.  The Case-Shiller 10 City Housing Price Index rose by an astonishing 189% almost tripling in value.



During periods of rising prices, Home Equity should increase rapidly as existing home owners benefit.  Given the scale of Housing Bubble appreciation, and the relatively leveraged state of homeowners, Home Equity should have increased substantially. 

Home Equity represented 58.2% of the housing market’s capital structure in 1995.  A theoretical homeowner with this level of Home Equity and an interest-only mortgage would have benefited materially from a 189% rise in home prices.



An existing owner’s Home Equity would have increased to 85.5% by 2005 without paying off a dime of mortgage debt. 

Actual U.S. Home Equity trends since the Housing Bubble's inception are revealing.



Instead of rising rapidly as prices increased, Home Equity was effectively flat during the Housing Bubble ranging between a low of 57.2%, a high of 59.7% and terminating at 58.5% in 2005.  There were several reasons for this lack of Home Equity accumulation.

• New and recurring Home buyers had access to increasingly leveraged mortgages (low or no down payment options) which diluted overall Home Equity
• Home owners chose to monetize theoretical Home Equity for current consumption (HELOCs)
• Owners with Home Equity opted to leverage it by buying larger homes or second houses
• Mortgage options proliferated that did not require principal to be paid down (interest only) or even allowed mortgage debt to grow over time (option-ARMS)

The price level of housing approximately tripled, but the percentage of Home Equity stayed the same due to a massive increase in mortgage debt.  When the Housing Bubble popped and prices began their reversion to pre-bubble valuations, falling prices directly eroded Home Equity on a highly leveraged basis.



Prices are collapsing, but mortgage debt remains.  During the past three years Home Equity has declined from 58.5% to 43.0%.  This is shocking given that the figure had never dropped below 57.2% in U.S. history.  Still more disturbing is that this Home Equity erosion continues.  On Thursday the Federal Reserve will report updated figures for the first quarter.  As we already know, home prices fell during the first quarter at the fastest pace on record.  The figure will be dismal. 

As home prices continue to fall Home Equity will erode on an increasingly magnified basis. 

The Government's Influence

Meanwhile the Government continues to hand out 100% loan-to-value mortgages through HUD, the FHA and other GSEs.  The newly created $8,000 tax credit for new home buyers is now being used as a bridge loan to finance purchases with no equity.  The Government continues to proactively dilute Home Equity in the misguided belief that sacrificing new home buyers on the “Alter of Homeownership” will appease the Housing Gods and stop the price collapse.  They are sadly mistaken.  The Government is creating “homeowners” will little on no equity that are quickly made insolvent by rapidly falling prices.  How is this strategy supposed to fix the housing market?

Dismal Reality

The smaller the percentage of U.S. Home Equity, the greater the likelihood of foreclosures and further price declines resulting in even lower equity levels.  Given the current economic environment, house prices will likely stop falling only when valuations become affordable.  Affordability is not attributable to a new Government scheme to finance 100% of purchases, but rather to a dynamic where potential homebuyers can afford to invest a down payment (Home Equity) of 20% or more.  We are no where near such a dynamic. 


“How many people in America do you think there are that can afford to put 20% down on a house at current valuations?”  -  Posted on August 16, 2007 by this author and still equally relevant


Monday's HEW Article:  Historical Home Equity Percentages Since 1945

Wednesday's Hew Article:  The Impact of Falling Prices on Housing Bubble Home Equity

Thursday's HEW Article:  Doomsday Scenarios: Could the Net Home Equity Value of the Entire U.S. Housing Stock Fall to Zero? 

Weekend HEW Article:  What Needs to Happen to Owner’s Home Equity for Housing to Stabilize Before 2014