On June 11th the Federal Reserve released first quarter data relating to the value of U.S. Household Assets, Mortgages and Home Equity.

Relative to year-end 2008 figures, during the first quarter:

• Household Real Estate Assets declined by $464.7 billion
• Household Mortgage Debt increased by $11.1 billion
• Owner’s Home Equity decreased by $475.8 billion
• Owner’s Equity as a Percentage of Household Real Estate Assets declined 1.5% to 41.4%

While the Federal Reserve data is seasonal, should the first quarter trend continue through the remainder of the year the Home Owner’s Equity Percentage (“HOEP”) will have declined to 37.0% by year-end 2009.

“HOEP” and Change

Prior to the Housing Bubble the HOEP had never declined below 63.8%.  During the housing distortion we established a new record low of 57.2%.  In 3 years and a quarter since 2005 HOEP has declined to 41.4% of the capital structure of the U.S. Housing Stock and is in free-fall.

Those familiar with the dangerous and destabilizing nature of debt (leverage) should be shocked by this trend.  The higher the percentage of debt layered on any asset class, the greater the price volatility and the higher the probability of both financial distress and steep price declines.

It does not matter when or where housing prices stabilize.  With debt constituting more than 60% of the value of the U.S. housing stock, prices will be volatile and high risk will persist.

I have no idea what level of Home Equity constitutes a safe or stable housing market.  Given that the U.S. equity percentage had never declined below 57.2% prior to 2006 I have assumed 55% as the minimal stable HOEP value.

In order for the housing market to stabilize prior to 2014 the HOEP trend must reverse itself immediately and rise rapidly.



Given an understanding of the current economy, housing trends and what is required for the HOEP to rise, this scenario is unlikely.

There are only a small number of means by which Home Equity can increase.

• Home prices can rise
• Homeowners can pay down mortgage debt or invest in capital improvements
• Debt can be reduced through mitigation or foreclosure

Current Reality

• Home prices are likely to continue to fall based on market fundamentals
• Should prices stabilize, they are unlikely to appreciate rapidly in the near future (ignoring the disastrous possibility of hyper-inflation)
• Given economic trends and rising unemployment it is unlikely that homeowners will make a meaningful dent in mortgage debt through increased capital investments
• The one means by which mortgage debt could be reduced materially is through foreclosures, but despite years of record foreclosures mortgage debt is still rising

It appears unlikely that Home Equity as a percentage Household Asset Values will increase above 50% in the near-term or return to a dynamic consistent with stability prior to 2014.  In fact, it will likely take a decade before this could occur. 

Beyond a return to historical normalcy, the HOEP trend is of serious concern.  At some level extreme housing stock leverage could feed on itself and threaten the entire economy.

Given the Government’s track record in responding to the economic crisis to date, it would not be surprising if policy makers further risked hyper-inflation or even intentionally manufactured it to some degree out of concern over collapsing HOEP. 


Monday’s Home Equity Week ("HEW") Article:  Historical Home Equity Percentages Since 1945

Tuesday’s HEW Article:  A Focus on Home Equity Since the Housing Bubble’s Inception

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

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