- Miller Samuel Real Estate Appraisers & Consultants - http://ms.clash.outthinkgroup.com -

[Getting Graphic] Equity Paradox: Its Not How Much You Are Worth, Its How Much You Can Borrow

Getting Graphic is a semi-sort-of-irregular collection of our favorite BIG real estate-related chart(s).

Click here for full graphic [NYT] [1]

Home equity lending volume has dropped off sharply [NYT] [2] over the past two years, prompted by the rise in short term lending rates.

The Equity Paradox: Although housing prices have steadily risen for the past 25 years, so has mortgage debt as a percentage of property values.

One of the by-products of the housing boom and the wealth effect as it relates to housing has been the change in borrower psychology. The first two items are logical and expected reasons why mortgage debt has grown:

However, the acceptance of greater debt as a way to fund consumer lifestyles has been the new development on the housing front in recent years:

Many economists worry that further weakness in the housing market, particularly if it leads to an outright drop in house prices, could shrink home equity and lead consumers to pull back in the months ahead.

In the article Home Equity Down, While Household Net Worth Is Up [REJ] [3] the fundamentals for consumer spending are good right now but consumer borrowing is dropping.

the Fed said consumer borrowing decreased by 0.6% in October, the largest monthly drop in 14 years. “In the grand scheme of things, households are stepping back a bit and being more conservative,” said Daniel Jester, an economist at Moody’s Economy.com.

As the economy weakens in 2007, one of the reasons is likely due to the pull back of consumer spending that was previous funded by homequity loans. A drop in interest rates may help temper the economic damage by preventing these borrowing costs from rising. However, its most important for the economy to ween itself off of debt dependency. Thats seems like only a remote possibility over the next several years. Once its part of our psychology, its probably tough to shake it loose.

I have got a lot of holiday shopping to do in the next few weeks, I sure hope my house can afford it.