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Home Equity Declines More than 60% During Great Recession says Fed Report

A new report from the Federal Reserve Bank of New York shows that the rise and fall of home prices between 2007 and 2009, had a dramatic impact on home owners equity.

“Perhaps the most defining aspect of the 2007 recession, and by many considered to be the origin of the financial crisis, has been the decline in the housing market,” said the report.  After reaching peak levels in April 2007, US home prices as measured by the FHFA price index had fallen 13% nationwide by the end of 2009.

The amount of decrease varied across the country with some areas getting hit harder than others.  For example, average prices dropped by 39% and 38% from their peaks in California and Florida, while average home prices fell by 4% in Colorado and increased by 1% in Texas.

When home prices increased, the total equity of homeowners rose, but it do so at a much lower rate with homeowner’s equity share in their homes actually staying relatively constant until the end of 2006.  “On average for each 1% increase in home prices, homeowners increased their mortgage debt by 1% (through higher balances on first mortgages, cash-out refinances, second mortgages and home equity lines of credit), so that proportionally their equity share in their homes actually remained constant,” said the report.

When home prices began to fall in 2007, owners’ equity in their real estate fell from almost $13.5 trillion in the first quarter of 2006, to a little under $5.3 trillion in the first quarter of 2009.  In that three year period, there was a decline in total home equity of over 60% said the report.  At the end of 2009, owners’ equity bounced back a bit and was an estimated $6.3 trillion but still more than 50% below its 2006 peak.

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While the Fed’s report fails to break out how much individual age groups lost in equity, the impact on borrowers ability to obtain reverse mortgages is significant.

A study conducted by the National Reverse Mortgage Lenders Association and the Hollister Reverse Mortgage Market Index showed that Americans 62 and older held an estimated $4.3 trillion of home equity in 2007.  Using numbers from the Fed report, the recession could’ve brought home equity for older Americans closer to $2.0 trillion in 2009.

To view a copy of the report, see here.

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