Homeowners Suffer $3.3 Trillion Home Equity Reduction

More bad news has been released on the state of the housing market. Homeowners absorbed trillions in home equity reductions last year, and most of the damage was done in the fourth quarter.

Children's author Dr. Seuss once said, "Don't cry because it's over. Smile because it happened." Unfortunately, the zany doctor's advice is little consolation to homeowners who are mourning the disappearance of their wealth and borrowing power.

Home equity: Here today, gone tomorrow

Back when the housing market was hopping, most people didn't stop to think about the real estate boom coming to an end. As a country, Americans tapped into their home equity borrowing power for vacations, private school tuitions, new cars, and kitchen makeovers-you name it, people bought it. It was fun, right up until the moment that self-regenerating home equity failed the population.

This month, Zillow.com reported that U.S. home values slid a cumulative $3.3 trillion last year. More than 42 percent of the decline, or $1.4 trillion, occurred in the last three months of the year. This startling home equity downturn puts a tight squeeze on household spending, and further weakens the financial strength of homeowners throughout the country.

A primary concern is the growing number of homeowners who are in a negative equity position, meaning that they owe more on their mortgages than their homes are worth. In normal economic times, this situation is bad, but not always critical; like owning a stock that has stumbled, the homeowner can wait until home values recover. But, given the rising unemployment in the U.S. today, mortgage holders also have to contend with the threat of job loss. Losing your job, combined with a negative equity position, is a scenario that often ends in foreclosure.

The Zillow.com data indicates that now nearly 17 percent of all U.S. homeowners were in a negative equity position at year-end. And that's after a year of soaring foreclosures and short sales.

Chips stacked against mortgagees

At the end of 2008, the country's inventory of vacant homes totaled a record 19 million. This excess inventory is one major obstacle standing in the way of a housing market recovery. As long as there are more homes for sale than there are interested buyers, home values will continue to falter. The federal government has talked about proposals to stimulate housing demand, but only a new tax credit for first-time buyers has been implemented thus far. Even if the Feds establish a more robust housing program, the task of working through that excess supply is daunting. All of this suggests that homeowners and mortgagees will not see a speedy return to the good old days of growing home equity. 

For the time being, Americans will have to adjust to the loss of wealth, and buckle down for a long and slow housing recovery. Those days of waking up richer than you were the day before thanks to a rise in home equity may have been fun, but they weren't sustainable.