Dark cloud of falling home equity may not hover over you

WASHINGTON — As a homeowner, seller or buyer, what should you make of the Federal Reserve's latest bombshell report on Americans' home-equity positions?

Panic? Mild concern? No big deal?

The dollar losses involved were huge and sobering. On a national basis, they document the personal financial impacts of declining home prices, especially in the frothiest boom markets of California, Florida, the Middle Atlantic states and New England.

But it's important to keep the Fed's numbers in perspective. They may not ring true in your own housing situation, your own neighborhood or where you want to buy or sell. It all depends on when you bought, and where.

With that in mind, here's a quick overview of the home-equity estimates assembled by the Fed and released June 5:

• To no one's surprise, home-equity holdings on a national basis got creamed during the past year. Homeowners lost an estimated $879.6 billion in net-equity wealth — that's the difference between the current market values of their houses and their current mortgage debt.

In the first quarter of this year alone, estimated national equity losses totaled $399.1 billion.

• Americans' equity in their homes represented just 46.2 percent of their properties' market values during the first quarter. Put another way, total mortgage debt exceeded owners' equity and made up almost 54 percent of total home values.

• The Fed's estimate of a nearly $880 billion loss of home-equity wealth may strike you as shocking, but look at that number with some perspective. During the boom years, nearly $3 trillion in net equity was racked up in a few years as prices exploded in local markets with high levels of speculative investments powered in part by low interest rates and funny-money mortgages.

Here's a crucial fact, however: Depending on where you live or own property, these wild gyrations of equity growth, followed by equity shrinkage, may not mean a lot.

Listen to Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Association and an expert on real-estate cycles.

Many areas spared

"I don't think numbers like an $880 billion equity loss are all that meaningful for most individual homeowners," he said.

"When you look at home-price data over the last five years, you find that large parts of the country never got caught up" in the boom-and-bust cycle.

The losses are highly concentrated.

"The Fed's [equity-decline] numbers for the country as a whole are really being dragged down disproportionately by the big drops in prices in California, Florida and a handful of other states," said Brinkmann. "Most markets haven't been hit anywhere near as hard."

The latest home-price index report by the federal government's monitor of property-value movements, the Office of Federal Housing Enterprise Oversight (OFHEO), backs up Brinkmann's point.

Small gains common

It found that even in the depths of the current down cycle, 56 percent of the 292 metropolitan areas it surveyed showed positive — though often small — price gains during the first quarter of this year.

The data cover millions of houses financed and refinanced by Fannie Mae and Freddie Mac, but exclude jumbo loans above $417,000 and most subprime loans.

Some markets are appreciating strongly, such as Austin, Texas (up 7.7 percent in the past 12 months); Grand Junction, Colo. (up 9.1 percent); Charlotte, N.C. (up 6.2 percent); and Provo, Utah (up 6.8 percent).

While prices in the Seattle-Bellevue-Everett area fell 0.43 percent in the first quarter, they were up 2.82 percent over the past year, according to the index, and 63.43 percent over the past five years.

But even in areas with steep price declines, the five-year net equity gains are still significant.

If you bought a house at the peak of the cycle in dozens of high-froth markets — anytime between 2004 and 2006 — "you probably have seen some significant declines" in your equity, says David Berson, chief economist for mortgage insurer PMI Group.

"But if you bought a few years earlier, you're still probably well ahead of the game."

Longer look

Five-year data from OFHEO suggest that is correct. Houses in Naples, Fla., lost 18.7 percent last year but are still up a net 61 percent over the past five years.

Riverside-San Bernadino, Calif., houses lost 13.8 percent last year but are still up a net 71.5 percent since 2003.

Metropolitan Washington, D.C., houses lost an average 5.1 percent last year but have gained a net 68 percent over the last five years.

Bottom line: National numbers, especially on the downside, get all the attention. But unless you bought at the peak of the boom in a highly volatile area using a toxic mortgage, things probably aren't anywhere near that bleak.

Kenneth R. Harney: kenharney@earthlink.net