Don’t fret over equity report

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

The dollar losses involved were huge and sobering, especially in the frothiest of the boom markets: California, Florida, the Middle Atlantic states and New England.

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

With that caveat 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. Just 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% of their properties’ market values during the first quarter. Put another way, total mortgage debt exceeded owners’ equity and constituted almost 54% 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 recent perspective. During the housing boom, 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 (and how long you’ve owned it), these wild gyrations of equity growth, followed by equity shrinkage, may not mean a lot, according to Jay Brinkmann, vice president for research and economics at the Mortgage Bankers Assn. and an expert on real estate cycles.

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

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. It found that even in the depths of the current down cycle, 56% of the 292 metropolitan areas it surveyed showed positive – though often small – price gains during the first quarter of this year. OFHEO’s data cover millions of houses financed and refinanced by Fannie Mae and Freddie Mac, but exclude jumbo loans above $417,000 and most sub-prime loans.

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 local markets – any time between 2004 and 2006 – “you probably have seen some significant declines” in your equity, says David M. Berson, chief economist for mortgage insurer PMI Group Inc.

“But if you bought a few years earlier, you’re still probably well ahead of the game.”

A look at five-year data from OFHEO suggest that is correct. Houses in Naples, Fla., lost 18.7% in value last year but are still up a net 61% over the past five years. Riverside-San Bernardino houses lost 13.8% last year but are still up by a net 71.5% since 2003. Metropolitan Washington, D.C., houses lost an average 5.1% last year but have gained a net 68% 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.

Ken Harney can be reached at kenharney@earthlink.net.