There Is Nothing Wrong with Homeowners' Finances

Anti-housing forces, including many in the media, have been insisting that heavy borrowing against housing equity has been pushing homeowner finances to the brink of disaster.  And yes, Federal Reserve Chairman Alan Greenspan has just unveiled Fed research showing home equity “extraction” of about $600 billion in 2004, and borrowing against equity should be even bigger this year.

These are staggering numbers, of course, but they don’t actually mean that something has gone wrong. Indeed, the Fed’s own national balance sheets show that homeowner equity grew to $10.5 trillion by mid-2005, up by 18 percent from a year earlier. Furthermore, the aggregate housing debt-to-value ratio stood at 43 percent at mid-year, lower than at any time in recent years.

It's also clear that mortgage debt repayment is not placing an undue burden on the income of America’s homeowners -- partly because mortgage debt has been substituting for a lot of shorter-term, higher-cost, consumer debt. Indeed, the Fed’s Financial Obligations Ratio for homeowners was only 16.37 percent in the second quarter, compared with 28.87 percent for renter households.

While the media may be able to find and highlight debt-strapped homeowners, the overall picture shows remarkably healthy current homeowner finances and a housing equity nest egg that could withstand very large unforeseen shocks. Even Chairman Greenspan concedes these points.