Home Equity Slides to Record Low in Third Quarter

December 7, 2007 No Comments »

According to the Federal Reserve’s quarterly U.S. Flow of Funds Accounts report, the amount of equity homeowners held in their homes fell to a record low 50.4 percent in the third quarter, down 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 in negative equity positions, making it difficult to refinance.

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 decline 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 mortgage payment.

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 of credit.

Home equity is 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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