Connecting the Home Equity Dots in 6 Easy Steps

1. Start with the percentage of homeowners who own their homes free and clear.

U.S. Census: Mortgage Characteristics - Owner-Occupied Units 2009 (pdf)

As seen in the table, there are 76.4 million homeowners and 24.2 million own their homes free and clear.

31.7%

2. Now look at total real estate value.

St. Louis Fed: Real Estate - Assets - Balance Sheet of Households and Nonprofit Organizations

$18.6 trillion

3. We can now crudely estimate the home equity of those who own their homes free and clear. This is just a ballpark estimate since we don't know the actual asset distribution (for example, it is possible that inexpensive homes are more likely to be paid off).

$18.6 trillion x 31.7% = $5.90 trillion

4. Now look at at home equity overall.

St. Louis Fed: Owners' Equity in Household Real Estate - Net Worth - Balance Sheet of Households and Nonprofit Organizations

$6.69 trillion

5. Now take the home equity overall and subtract the estimate for those who own their homes free and clear. The remainder shows the total home equity for those with mortgages.

$6.69 trillion - $5.90 trillion = $0.79 trillion

6. And lastly, we'll go back to the first link and see that there are 52.2 million homeowners who do not own their homes free and clear. Using crude ballpark estimate math, what is the average home equity for owners who have a mortgage?

$0.79 trillion / 52.2 million = $15,000

Ouch.

Mortgage equity withdrawal

The rate of MEW has been linked to Marginal propensity to consume (MPC), as measured by Personal Consumption Expenditure (PCE). In the United States, during the dramatic rise in house prices MEW funded PCE 1.1 to 1.7% from 1991 to 2000, and almost 3% from 2000 to 2005 and was responsible for more than 75% of GDP growth from 2003 to 2006.

Are you wondering where the remaining GDP growth came from? In my opinion, we borrowed it too.


Click to enlarge.

We borrowed all we could and all I got was this lousy t-shirt!