Money has an article that shows Americans own a lower percentage of their homes than in the past (which increases their risk). The facts:
As more and more people have rushed to be homeowners, they actually own less of their homes than they have in decades...adding another risk factor to the overheated real estate market. On average, homeowners have 56.3 percent equity in their homes, according to Demos, a public-interest research group. In 1973, equity averaged 68.3 percent; in the 1950s, it was upwards of 80 percent.
Two main factors are at work: Homeowners are starting off further behind. In the past, the standard down payment was 20 percent. A 2003 National Association of Realtors survey reported than less than half of all home buyers now put that much down; many obtain 100 percent, even 103 percent, financing. In addition, homeowners are yanking out cash. From 2001 through 2004, Americans took $330 billion in equity out of their homes, according Freddie Mac. In 2005 alone, they'll pull out as much as $160 billion.
This could be a big problem:
Demos's senior research associate and author of A House of Cards: Refinancing the American Dream, Javier Silva, said that, even in the absence of a real estate crash, many families "are facing a financial crisis," partially because they've taken on more mortgage debt. Already, the average American's financial obligations ratio (FOR) -- all your regular bills you must pay each month compared with income -- has expanded to 18.45 percent. That's up from about 15.5 percent in the early 1980s, and among the highest since the Federal Reserve began calculating the statistic.
Until recently, according to Silva, homeowners cashed out home equity to pay for home renovations, college tuition, or maybe to start new businesses, all of which are reasonable motives. Today, though, Silva says, many mortgage brokers have convinced consumers to cash out equity to buy new cars, boats, or other big ticket items. But using home equity that way, he says, "is extremely risky. You're pulling equity out of your home – that's your family's security. And you're mixing bad credit with good."
However, it's not all bad news:
Some are also using home equity to pay off credit card debt. Gerri Detweiler, author of The Ultimate Credit Handbook, has mixed feelings about cashing out home equity to pay off plastic. "Done properly, it can be beneficial," she said.
Yet the risk is real:
Silva worries that if housing prices flatten out or decline, some newer homeowners who have built up little equity, could find themselves "upside down" -- owing more than their houses are worth.
And, if interest rates rise, homeowners with adjustable rate mortgages may not be able to keep up higher payments or sell the house for what they paid.
Foreclosures could spike and the supply of homes for sale soar. That could send real estate market into a tumble. "That's the scenario I'm most afraid of," said Silva, "and it's one that few economists acknowledge."
All I can say is be very careful when messing with the equity in your house. It's something that's easily lost and hard to make up.
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