Debt Outpaces Value of Housing

The mortgage crisis is beginning to take a turn for the worst by slicing into home equity. Many homeowners are now finding that they have no equity left on their house and are facing rising interest-only payments that they are struggling to pay. The problem is that declining housing prices has wiped out any value from the principal that they have repaid and instead left them with no equity and rising monthly mortgage payments. Obviously, this is a big problem for an economy that has traditionally relied on homes to provide not only capital gains but also a line of credit to support consumer spending.

This occurrance is the first time that debt tied up in homes actually exceeded the equity homeowners have built over the years. In fact, the Fed reported today that homeowner equity actually slipped below 50 percent in the second quarter of last year and fell to just less than 48 percent in the fourth quarter. This is clearly a big problem as homeowners that have spent their life building up equity are now losing it all in a matter of months.

Matters are made worse by the fact that there is no bottom in sight for the troubled housing market. In fact, many expect prices to continue falling for a year, two or three to come. Declining home prices will only continue eating into equity and cause further erosion in value, tightened lines of credit, and higher mortgage payments. Obviously, this is a big problem that may take awhile to solve…

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