According to the Federal Reserve’s quarterly U.S. Flow of Funds Accounts report, the amount of equity homeowners hold in their homes fell to a record low of 50.4 percent in the third quarter from 51.1 percent the previous quarter.
And economists expect that number to fall even further as home prices are expected to plummet over the next year and change.
The result could leave many homeowners with less than 50 percent equity in their home, or essentially owing more than they actually own.
Despite the recent housing boom, many borrowers chose to tap into the rising equity in their homes by executing countless cash-out refinances, leaving some with negative equity as prices began to stagnate and fall.
The fall in home equity is also attributed to high loan-to-value loan programs that allowed many homeowners to obtain 100% financing, and in some cases beyond that if they chose a negative amortization loan and only made the minimum payment.
“Although homes increased hugely in value, homeowners were borrowing against them as fast if not faster than the appreciation,” said Dean Baker, co-director for the Center for Economic and Policy Research.
“And when people were buying new homes, they were getting them with as a little as 5 percent, 2 percent down, even nothing at all.”
It is believed that a decline in home equity could also curb retail spending as homeowners find themselves tapped out, decreasing their chances of opening a home equity line.
Home equity is equal to the percentage of a property’s market value minus mortgage-related liens.
This figure was 62 percent at the end of 1990, according to the Federal Reserve.
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