Everyone knows that U.S. house prices have fallen almost 30% from the peak. What is less well known is that Americans’ equity in those houses–the part that American homeowners actually own–has fallen much further. Why? Because, despite all the foreclosures and write-offs, our total mortgage debt has only dropped slightly from its peak.
When value falls and debt stays the same, equity gets crushed (See The Problem With Debt). If house prices end up falling more than 40% peak to trough, which seems likely, U.S. homeowner equity will drop more than 70% and as many as half of American mortgage holders will be underwater.
For most consumers, one’s house is one’s biggest source of wealth. Economists have demonstrated that a loss of wealth leads to cuts in spending–from psychology and necessity. A 50%+ drop in home equity is one whopping-big loss of wealth. And it will have a lasting impact on consumer spending.
See Also: The Problem With Debt
Notes on the chart:
- Total mortgage debt from the Fed Reserve through Dec 31 2008
- Mortgage-to-value ratio estimated at 45% at the peak, per data from Northern Trust
- Total housing value at peak estimated at $25 trillion (exact value not so important)
- Quarterly change in home prices from Case Shiller Comp 20 through Dec 31 2008.
- Change in homeowner equity The Business Insider estimates (value less debt).
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