For example, he shows that, as a percentage of the total asset value of all “household” real estate, home equity has stayed at the constant level of 58.7% for the last five years. That implies that as home buyers purchased, and homeowners refinanced their debt burden has stayed, on average, at a constant level of 42% of the overall asset price (market price of the home) of the home.
At first, this seems fairly positive, as it would appear that all the stories of home buyers overstretching their debt and homeowners piggy banking their home equity may have been a bit exaggerated.
Yet a second look at the chart does reveal something a bit startling if you’re inclined to foresee a bearish future.
Notice in the chart above, that the total asset value, the mortgage total and the equity total have all either doubled or nearly doubled in just five years. Taking a more bearish stance, one could wonder what the debt/equity ratio would look like if asset prices were to retrace back to 2000 levels. This would put the asset total back to $11,401 (all numbers are in billions) but the debt total would remain at the 2005 level of $8196 (obviously this is just a rough estimate to prove the point). In this scenario, equity would fall to a total of $3205 or just 28% of total home asset prices with debt jumping to 72% of the total asset price.
Not that this is some “Ahahhh” moment, since its pretty obvious that things would not look so good if home prices fell back to 2000 levels, but the point is, since the appreciation over the last five years has been so meteoric, it doesn’t take much backward movement… just a few years, to flip the numbers completely around. To me it seems precarious.
Additionally, Cagan plots home equity as a percentage of home asset prices in virtually every conceivable way possible. One interesting chart he produced (shown above) shows a cumulative distribution of the current equity in homes (either purchased or refinanced) with equity ranging from -40% to 100% equity. Additionally, he builds a column of this distribution for loans that originated in every year from 1985 to 2005.
So the key to this chart is that is shows the current standing of equity for homes purchased (or refinanced) from 1985 to 2005. Furthermore, it shows that there are homes that range from -40% to 100% equity. Notice also that the values in each column are cumulative so, for example, for homes purchased in 1985, only 1.3% have negative equity in the range of -35% to -40% and 6% of homes have 0 to -40% equity.
Now, look at the years 2003 – 2005. There are currently a substantial number of homeowners at 0 to -40% equity. Startlingly, 29% of loans originating in 2005 already have no or negative equity. Also, the chart shows that if homes prices fall 10% nationally, that would push 47.7% percent of 2005 loans into the 0 to –40% equity column.
Well, I could go on and on as there is PLENTY of interesting information in this article including equity distributions for many of the local housing markets as well as equity (including negative equity) distributions across different loan products (fixed, ARMs, etc).
This paper certainly seems to prove that home equity has risen very sharply, especially in the last five years and it seems to point to the fact that if you prefer to feel bullish on housing, you need to justify this outstanding windfall appreciation increases with some substantive reasoning.