Homeowner Equity Is Going Down

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The fall off isn't much, only about $1,500, from $91,000 in 1989 to $89,500 last year. But it has the Consumer Federation of America worried because home equity is a large part of the typical household's net worth.

The decline means many home owners have accumulated little or no wealth over the decade, making them "no better off" than renters, said CFA Executive Vice President Stephen Brobeck.

One reason for the drop is the increase in low-downpayment lending. During the 10-year period, the study by Frank Nothaft, an economist with Freddie Mac, on behalf of the CFA found that the ratio of mortgage debt outstanding to the value of all houses increased from 31 percent to 34 percent.

Another is the increase in borrowing by owners against the equity in their homes. In the 1989-'99 period, the proportion of owners carrying home equity debt rose from 58 percent to 61, according to the study.

CFA doesn't advocate curtailing either of these trends. Indeed, Brobeck said the boost in home ownership that has been fueled in large part by first-time buyers with little cash of their own is "of paramount importance to our society."

"Low-downpayment lending has put people into homes who wouldn't be there otherwise," he said. "And their financial risk is limited to mostly their closing costs, so it is not particularly dangerous."

But the consumer advocate warned that owners should exercise care when borrowing against their homes. "If people were more cautious," he said, "these problems would be self-correcting."

Specifically, people should use their equity only for home improvements, education, medical needs or business opportunities, he said.

There is nothing wrong with using equity to pay off more expensive consumer debt, as long as owners who do so don't take on more debt, he also said. "Unfortunately," he added, "most continue to borrow."

On a positive note, the study also found that home equity increased for lower-income and African American households. During the 10-year period, equity rose an average of 6 percent, from $76,000 to $80,400, for owners with incomes below their area median, and 12 percent, from $53,400 to $59,700, for African Americans.

At the same time, though, equity declined for owners under age 55. Households headed by someone younger than 45 had 14 percent less equity than their counterparts a decade ago.

Stressing that "home ownership is not just (about) getting into a home, it's also (about) paying off the mortgage and building home equity," Brobeck said a "number of young home owners are not as aware of that as they should be. And many are heading for serious financial trouble."