Friday, June 10, 2011

Home Equity is near a record low

Due to the falling prices of Real Estate, home equity has been chipped away at.  The typical home owner has 38% equity vs. 61% a decade ago.  This is near the lowest point since WWII.

Even with the low mortgage rates of today (which many can not qualify for) the rates have failed to help the depressed housing market.  The home prices in large cities have fallen to 2002 levels.

The falling values is resulting in home owners being "under water."  Typically if you pay down your mortgage, your home equity goes up. As it stands now, the amount of money you pay down is not enough to counter the housings markets dip. 

In order to understand this, imagine you are jogging to catch a person walking in front of you.  This is you paying off your mortgage.  Once you catch the person, you are paid off and every step past them is equity in your house.  Now you are jogging, but the walker has started sprinting.  The further the person gets from you, the longer it will take to catch them.  In turn, more difficult to pay off your mortgage. 

Now this is a simplification, but may help you visualize the issue. 

Of the 74.5 million homeowners in the US, about 60% currently have a mortgage.  Out of of that 60%, 23 % are "under water" and about 5% are close to being "under water"

The US Government did withhold the cash incentives it set up for lenders under its 2-year-old foreclosure prevention program.  They thought it would prevent 4 million foreclosures, but it only helped less than 700,000 people.

The typical home in foreclosure sells 20% discounted on average.  In turn, it erodes prices in the neighborhood. 

We need a big change to save the home owner. 
Reference to the AP

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