According to Kenneth Harney’s article in this week’s Seattle Times, “Equity Makes Return To Homefront,” there may be hope on the horizon for real estate values! The Federal Reserve measures homeowners’ net equity holdings and have found a recent increase from $5.9 trillion during the first quarter of 2009 – the bottom of the recession – to just under $7 trillion through the second quarter of 2010. This means more homeowners have more equity in their homes. Possible causes are increased home values and decreased debt. Yes, home values are starting to stabilize, even increase in some markets, but more than that, people have started deleveraging, that is cutting debt across the board. That means credit cards, student loans, and as a result household balance sheets are getting better. Additionally, lenders have tightened up on high balance credit, restricting home equity lines and have in general made in harder for people to get themselves overextended. That isn’t necessarily helping those who were overextended when the recession hit hard yet, but the market is showing signs of stabilization, and if that holds, corrections will follow. Harney asserts, “the latest Fed numbers suggest the equity crash probably is over and that a rebuilding, with healthier credit habits, is under way.”
A small current running through this article that I want to highlight as it has been a mega theme in some of the other financial reading I have been doing recently is that concerning debt management. I have recently finished Dave Ramsey’s book, The Complete Money Makeover, and have just started Peter Schiff’s, How An Economy Grows and Why It Crashes. Ramsey is clear, and although I’m still in the introduction of Schiff’s book, both authors seem to echo the same message. Debt is a dangerous game. Going into debt to acquire an appreciating asset is not a bad idea, for example, to buy a home. However, even that should be embarked upon wisely, with enough down payment to establish enough initial equity to make the payment affordable (no more than 20 to 25% of your monthly income), and have an emergency fund to cover your payments should you lose your job. Lenders who approve your loan make sure these numbers are in place and line up. Then, don’t take that equity out to purchase things that depreciate and, Ramsey takes a very hard line on this one, never, never go into debt to acquire a depreciating asset otherwise known as consumer debt most commonly in the form of car payments and credit cards. He has this crazy notion that you should save the amount you would spend on the payment each month for the car or couch, and over time you will have enough to pay cash for the item, save the interest you would have paid, and avoid consumer debt. Anyway, it’s a good book I would highly recommend, but I mention it here because debt reduction seems to be one of the contributing factors to the net equity holdings making resurgence, which is good, good news!
