Weakening Housing Market Leads to Rising Debt Burdens

March 8, 2007 (Housing Byte)

Weakening Housing Market Leads to Rising Debt Burdens

For Immediate Release: March 8, 2007

Contact: Lynn Erskine, 202-293-5380 x 115

Housing Byte by Dean Baker

The quarterly Flow of Funds data from the Federal Reserve Board show that homeowners are taking on mortgage debt far more rapidly than their homes are appreciating in value. Homeowners increased their mortgage debt at a 6.4 percent annual rate in the 4th quarter, adding debt at an annual rate of $594.4 billion, down from the $775.2 billion annual rate in the 3rd quarter. This debt includes both money to purchase houses and money borrowed against existing homes. However, home values appreciated at just a 4.4 percent annual rate in the quarter.

As a result, the ratio of equity to home value is falling sharply. At the end of the fourth quarter of 2006, the ratio of equity to home value stood at 53.1 percent, down from 54.3 percent at the end of 2005. By contrast, it stood at 57.9 percent as recently as 2000, and was close to 70 percent until the nineties. This drop in homeowners’ equity raises concerns about the retirement security of the baby boom generation. Most of the baby boom generation is near retirement and has few assets outside of their homes. The Fed’s most recent Survey of Consumer Finance showed that 53 percent of the age cohort from 45 to 54 had less than $54,000 in financial assets (including defined contribution pensions) in 2004. If workers in this age group are to have any substantial source of income in their retirement years, other than Social Security, they will have to rely on equity in their home. If weak house prices reduce equity even further for this group, it will be difficult for them to save enough in their remaining working years to offset the loss.