Interest Rate Roundup

Monday, September 17, 2007

Some Flow of Funds figures ...

Every quarter, the Federal Reserve releases a voluminous report on borrowing, lending, and corporate and household balance sheets called the "Flow of Funds" report. The Q2 report was just released today. You can find links to the entire report and its subcomponents here. But here are a few notable observations that pertain to home lending ...

* Household home mortgage debt grew at a seasonally adjusted annual rate of just 7.3% in Q2. That was down from 7.7% in Q1, continuing a string of recent quarterly declines. On a full-year basis, mortgage debt growth hasn't been this low since 1997 (6.1%).

* Collectively, home mortgage borrowers now owe $10.1 trillion, up from $9.96 trillion in Q1. By way of comparison, total business debt in the most recent quarter was $9.48 trillion.

* Owners' equity as a percentage of household real estate continues to decline. It sank to a record low of 51.7% in the second quarter from 52.2% in the first quarter. What does that mean? Homeowners on the whole own a smaller and smaller chunk of their homes after you take into account the amount they owe on their mortgages.

This downtrend has been going on for years (as shown in the chart above, which goes all the way back to the early 1950s), so your first impulse might be to dismiss it as nothing remarkable. But consider how much home values surged between 2001 and 2006. All else being equal, that surge in home values should have left people sitting on larger and larger equity positions. Think about it in simple terms: If you buy a house for $100,000 with a $100,000 mortgage, your equity position is 0%. If your house doubles in value to $200,000, and your mortgage stays roughly the same, your equity position jumps to 50%.

But as these figures show, owners' equity has NOT increased. Instead, it has gone down. That means U.S. consumers have borrowed every last penny of additional equity generated by rising prices -- and then some. Or in layman's terms, there is something to the argument Americans have used their houses as ATM machines.


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