mhd
06-22-2003, 05:33 PM
washingtonpost.com
Home Equity Now Holds Key to Wealth
By Kenneth R. Harney
Saturday, June 21, 2003; Page F01
Call it an outstanding year for American homeowners: Their net equity wealth grew by a stunning $405 billion to a record $7.6 trillion by the end of 2002. And their mania for multiple refinancings -- $2.5 trillion in 2002 alone -- helped them pump almost $200 billion into a recession-prone economy via equity cash-outs and lower monthly mortgage payments.
Home equity -- not stock ownership or other investments -- is now "the anchor of household wealth," according to the 2003 State of the Nation's Housing report, released this week from Harvard University's Joint Center for Housing Studies.
Home equity opens the doors to tax-subsidized consumer borrowing and spending, plus accumulation of capital sheltered from federal or state taxation. As a result homeowners enjoy, on average, much higher net wealth per household than those who rent. At the end of 2001, according to the Harvard report, the median home-owning American household had a net wealth of nearly $172,000. The median household net wealth for renters, by contrast, was $4,810.
For lower-income homeowners, the role of home equity in household wealth is even more important. The median net wealth of homeowners in the bottom 20 percent of all income-earning households was $68,000; for half of that group, home equity represented 80 percent or more of their total wealth. For renters in the bottom 20 percent of incomes, the median household net wealth was just $500.
Much of this relative wealth among homeowners is attributable to the high annual gains in home values since the mid-1990s. In some markets there was double-digit appreciation for five years or more, raising concerns about speculative "bubbles" blowing up in owners' faces.
The Harvard study agrees that there is at least a remote potential for trouble: It reports that since 1997, home price gains have exceeded income gains in 48 of the 50 largest metropolitan areas. Moreover, "inflation-adjusted home prices rose faster in 2001 than at any time since 1978 and nearly as fast again in 2002."
But the housing market already is showing signs of correcting itself and cooling down. In 2002, according to the study, "real home price inflation slowed in 55 of the largest 100 metropolitan areas, was flat in 3" and slightly negative in two, Austin and San Jose. Both areas were hurt economically by the high-tech flameout.
Corrections and slowdowns are not the same as bursting bubbles, however. To trigger an actual decline in home values, you need "concentrated job losses, the likes of which have not been seen during this business cycle," according to the Harvard researchers.
Home prices "fall when so many people must sell their homes at the same time that demand is soft." Yet "even during national or regional recessions, most metropolitan areas do not experience severe job losses or housing price declines."
During the last major period of regional house price reversals, in the late 1980s and early 1990s, there were declines of 5 percent or more in just 24 of the 100 largest markets. In other words, even in a recession, home prices in only one out of four large metropolitan areas fell enough to wipe out the value of a modest 5 percent down payment.
Add in the leverage used by most buyers to acquire homes and the potential for serious losses in recessions becomes even less likely. For example, if a buyer put down $10,000 (10 percent) to acquire a $100,000 house with a $90,000 mortgage, the buyer's leverage ratio is 10 to 1. It would take a 10 percent decline in home values for the buyer to lose the full $10,000 investment.
The point here, according to the Harvard researchers, is that even major economic downturns typically don't make much of a dent on home values or equity investments.
For the long term, the outlook continues to be positive for home buying and property values. The aging, pre-retirement baby boomers represent the richest generation ever, and they are set to fuel the trade-up and second-home markets for more than a decade to come. Their "echo boomer" children, now entering their prime, first-time purchase years, should do the same for more moderate-cost sectors of the housing marketplace.
And once the baby boomers start passing along a portion of their wealth to their children, a multitrillion-dollar intergenerational capital transfer of unprecedented magnitude, look for still another major stimulus to sales and home values, provided there is no change in federal tax policy.
Kenneth R. Harney's e-mail address is kharney@winstarmail.com.
© 2003 The Washington Post Company
Home Equity Now Holds Key to Wealth
By Kenneth R. Harney
Saturday, June 21, 2003; Page F01
Call it an outstanding year for American homeowners: Their net equity wealth grew by a stunning $405 billion to a record $7.6 trillion by the end of 2002. And their mania for multiple refinancings -- $2.5 trillion in 2002 alone -- helped them pump almost $200 billion into a recession-prone economy via equity cash-outs and lower monthly mortgage payments.
Home equity -- not stock ownership or other investments -- is now "the anchor of household wealth," according to the 2003 State of the Nation's Housing report, released this week from Harvard University's Joint Center for Housing Studies.
Home equity opens the doors to tax-subsidized consumer borrowing and spending, plus accumulation of capital sheltered from federal or state taxation. As a result homeowners enjoy, on average, much higher net wealth per household than those who rent. At the end of 2001, according to the Harvard report, the median home-owning American household had a net wealth of nearly $172,000. The median household net wealth for renters, by contrast, was $4,810.
For lower-income homeowners, the role of home equity in household wealth is even more important. The median net wealth of homeowners in the bottom 20 percent of all income-earning households was $68,000; for half of that group, home equity represented 80 percent or more of their total wealth. For renters in the bottom 20 percent of incomes, the median household net wealth was just $500.
Much of this relative wealth among homeowners is attributable to the high annual gains in home values since the mid-1990s. In some markets there was double-digit appreciation for five years or more, raising concerns about speculative "bubbles" blowing up in owners' faces.
The Harvard study agrees that there is at least a remote potential for trouble: It reports that since 1997, home price gains have exceeded income gains in 48 of the 50 largest metropolitan areas. Moreover, "inflation-adjusted home prices rose faster in 2001 than at any time since 1978 and nearly as fast again in 2002."
But the housing market already is showing signs of correcting itself and cooling down. In 2002, according to the study, "real home price inflation slowed in 55 of the largest 100 metropolitan areas, was flat in 3" and slightly negative in two, Austin and San Jose. Both areas were hurt economically by the high-tech flameout.
Corrections and slowdowns are not the same as bursting bubbles, however. To trigger an actual decline in home values, you need "concentrated job losses, the likes of which have not been seen during this business cycle," according to the Harvard researchers.
Home prices "fall when so many people must sell their homes at the same time that demand is soft." Yet "even during national or regional recessions, most metropolitan areas do not experience severe job losses or housing price declines."
During the last major period of regional house price reversals, in the late 1980s and early 1990s, there were declines of 5 percent or more in just 24 of the 100 largest markets. In other words, even in a recession, home prices in only one out of four large metropolitan areas fell enough to wipe out the value of a modest 5 percent down payment.
Add in the leverage used by most buyers to acquire homes and the potential for serious losses in recessions becomes even less likely. For example, if a buyer put down $10,000 (10 percent) to acquire a $100,000 house with a $90,000 mortgage, the buyer's leverage ratio is 10 to 1. It would take a 10 percent decline in home values for the buyer to lose the full $10,000 investment.
The point here, according to the Harvard researchers, is that even major economic downturns typically don't make much of a dent on home values or equity investments.
For the long term, the outlook continues to be positive for home buying and property values. The aging, pre-retirement baby boomers represent the richest generation ever, and they are set to fuel the trade-up and second-home markets for more than a decade to come. Their "echo boomer" children, now entering their prime, first-time purchase years, should do the same for more moderate-cost sectors of the housing marketplace.
And once the baby boomers start passing along a portion of their wealth to their children, a multitrillion-dollar intergenerational capital transfer of unprecedented magnitude, look for still another major stimulus to sales and home values, provided there is no change in federal tax policy.
Kenneth R. Harney's e-mail address is kharney@winstarmail.com.
© 2003 The Washington Post Company