by David Wilkening
Almost half of all U.S. homeowner’s equity has been wiped out as a consequence of the real estate crisis, resulting in major changes in the future plans of millions of Americans.
“The loss of equity is extremely important for the current state of the housing market,” said Dean Baker, co-director of the Center for Economic and Policy Research, which publishes the weekly Housing Market Monitor.
Mortgage companies and banks in distressed markets are now requiring down payments of 20 percent. If you add another 6 percent real estate agent’s fee, an average homeowner with a mortgage would not have enough equity in their home to cover the down payment for a similar house.
In the past, down payment requirements have primarily been a problem for first-time home buyers but that has changed. “In the current market, down payment requirements are likely to be a serious obstacle to purchasing a new home even for many families who have already owned a home,” Baker said.
The problem is particularly pressing for the nation’s 78 million baby boomers born between 1946 and 1964 who are nearing retirement. For many, home equity was their main source of future retirement wealth. Over one-third have zero retirement savings. Many were counting on the equity in their homes, which has eroded.
Baby boomers have a higher rate of home ownership than the national average with one out of four owning more than one property, according to the National Association of Realtors. Seven percent also own a vacation home.
There’s not much baby boomers can do but wait for a return of the market and hope it isn’t too many years before it returns to more prosperous times. Some will be forced to delay or even cancel retirement in order to save enough of a nest egg to enjoy their golden years some day. Others will cancel plans to buy a boat, pay for college educations for their children, or make other major purchases like a vehicle or RV. The loss in home equity has wide reaching affects on the overall economy.
But what about younger workers who have used up their line of equity credit and face possible foreclosure? For individuals who want to simply sell their homes, there is mounting evidence that in some markets at least, lower prices are attracting buyers. In some areas of the country home sales are increasing marginally as prices drop.
Some retirees have a principal and a vacation home, often in the Sunbelt. The vacation homes will probably be the last to be sold off. Industry experts say homes in some warm-weather areas such as Florida and Arizona will not depreciate as much in some neighborhoods as they will in colder climates.
As millions of baby boomers put their homes on the market in the next two decades, the market may drop further in some regions of the country. For families or younger people who can afford larger houses, it may be something of a “buyer’s market.” However, most observers question whether members of generation X want the larger homes that baby boomers tended to buy.
The situation is even worse for those who own “McMansions.” They are generally defined as having at least 5,000 square feet of space (double the average house) and are often characterized as cookie-cutter style homes on small lots. Many people who built “McMansions” are having trouble making their mortgage payments and are unable to sell their homes.
Distressed borrowers can sell their homes for less than the loan amount if the banks agree. Another possibility for motivated sellers is to provide owner financing, but that is is not an attractive option for most homeowners since they generally want to repurchase another home with the proceeds from the sale.
Barring that homeowners are finding out that in a limited number of instances it is possible to renegotiate mortgages. In a small number of cases, lenders are accepting smaller payments because it is preferable to no payments at all. The loss of homeowners equity is likely to take many years to rebuild.