Home equity shrivels up

Falling home prices have shrunk equity so much that the proportion of homes that Americans actually own is near its lowest point since World War II.

Average home equity plunged from more than 61 percent at the start of 2001 to 38 percent in the January-to-March quarter this year, the Federal Reserve said in a report Thursday. That drop comes as home prices in big metro areas have reached their lowest levels since 2002.

The Fed’s quarterly report shows how much wealth, or net worth, Americans have gained or lost. Net worth is the value of assets such as homes and stocks, minus debts such as mortgages and credit cards.

Americans’ overall net worth grew 1.65 percent in the January-to-March period, to $58.06 trillion, because of stock market gains. Stock values as measured by the Dow Jones U.S. Total Stock Market Index gained $970 billion last quarter. Since then, they have lost $651 billion through Wednesday’s stock market closing.

The report showed that corporations are still hoarding cash. Excluding banks and other financial firms, companies held $1.9 trillion in cash at the end of the January-to-March quarter. That was slightly more than in the previous quarter and set another record.

The reluctance of companies to spend more of their cash stockpiles helps explain why job growth has been slow. U.S. employers added 54,000 jobs in May, far fewer than the average of 220,000 they added in the previous three months. The unemployment rate is 9.1 percent, slightly higher than it was when the year began.

The Fed report showed that household debt declined in the January-to-March period at an annual rate of 2 percent from the previous quarter. That drop was entirely a result of a decline in mortgages.

Auto loans, student loans and other consumer credit rose 2.4 percent — the second straight gain after nine consecutive declines. Analysts say the increase is driven by more people, many of them unemployed, borrowing money to attend school.

Average household wealth rose to $517,614 last quarter. It has risen nearly 19 percent from its early-2009 bottom, but it’s still about 11.5 percent below its peak in mid-2007.

Greater wealth normally would spark consumer spending. But their shrunken home equity is making many people reluctant to spend freely. That is holding back growth because consumer spending accounts for 70 percent of the economy.

Debt now accounts for 119 percent of disposable income — down from a peak of 135 percent in late 2007. Many Americans are reducing their home mortgage debt because they are going into default on their payments and losing their homes to foreclosure.

“A lot of this debt reduction is not voluntary,” said Dana Saporta, director of U.S. economics at Credit Suisse. “It’s due to foreclosure activity.”

The average household owes nearly $119,000 on mortgages, credit cards, auto loans and other debt, according to an Associated Press analysis of government data. That is down from more than $125,000 in 2008.

When people pay down their mortgages, their home equity normally rises. But since the housing bubble burst in 2006, prices have fallen more than they did during the Great Depression. In many cases, people are paying off mortgage interest and losing equity at the same time.

There are 74.5 million homeowners in the U.S. Nearly 25 percent of those homeowners are “underwater,” which means they have negative equity in their homes, according to the private real estate research firm CoreLogic. Another 25 percent are nearing that point.