Mark Stein picked up on it yesterday; the WSJ splashes it across the front page today; Whitney Tilson has included it in his 75-page slide show entitled "Why We Are Still in the Early Innings of the Bursting of the Housing and Credit Bubbles". What is it? The fact that on line 50 of table B.100 of the Federal Reserve Flow of Funds report (you can find it on page 110 of this pdf), "owners’ equity as percentage of household real estate" is less than 50%.
The first question: why is everybody glomming on to this now? The number has now been below 50% for the past three quarters: it’s nothing new. The second question: why look at the equity ratio? It seems to me that line 49, "owners’ equity in household real
estate", is really more germane in answering the question of how much wealth Americans have tied up in their houses, net of debt. That has fallen to $9.65 trillion in the fourth quarter from $9.93 trillion in the third quarter – it hasn’t been this low since 2005, and it’s down from a peak of $10.07 trillion in the first quarter of 2007. That erosion of $426 billion in wealth over the course of the year seems to me much more relevant than the ratio of total wealth to housing values.
After all, there are actually very few people who have anywhere near 50% equity in their homes. Most homes are either paid off in full or else very highly mortgaged: taking the average gives you a number near 50%, to be sure, but we’re definitely not talking about a bell curve here. The mean might be 47.9%, but the mode is 0%.
Over the course of 2007 house values actually rose, by $550 billion, according to the report, although they pulled back to the tune of $95 billion in the final quarter. But mortgage values rose faster: they increased by $655 billion over the year, and by $116 billion in the final quarter. Those are all interesting numbers. But the ratio of mortgage values to house values? That one I’m having difficulty getting excited about.