Monday, June 13, 2011

As Housing Prices Fall...Home Equity Drops too

The housing market has never looked better for many people. However, if you are looking for equity then things have not looked so bleak since World War II. As a residential “double dip” in the market becomes a reality, Robert Schiller, co-founder of S&P Case-Schiller index, predicted that property values could decline from 10 to 25 percent more over the next five years. He believes that unemployment, a backlog of foreclosures that is dissuading builders from new construction and possible inflation will all combine to create the lowest home values seen since the Second World War We should note that Schiller does tend to be incredibly pessimistic, and that other experts like Brian Moynihan (a notorious optimist and Bank of America CEO), have said that additional declines in home equity are likely to be “incremental.” Schiller countered this by pointing out that if inflation picks up, “you could have flat nominal prices but still have it [equity] go down 20 percent.”

In 2001, average home equity, was more than 61 percent. This year in the first quarter, it was 38 percent according to a Federal Reserve report released last week. These are the lowest equity levels since 2002. However, most analysts agree – even if they disagree with each other – that making predictions is hard during this time period. “There is no precedent for this statistically, so no way to predict,” admitted Schiller. Household debt is actually decreasing, although this is due “entirely to a decline in mortgages” according to the Fed.

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