Improving household net worth is key to achieving sustained economic growth. And homeowner equity is an important component of total household net worth. As we’ve noted in an earlier post, sustained GDP growth will be difficult to achieve without a reduction in the personal savings rate. The savings rate will remain elevated as long as households believe they have excessive debt and experience declines in assets values, including owner-occupied housing.
That said, there is some good news in Flow of Funds data for the second quarter of 2010. Published by the Federal Reserve, the Flow of Funds accounts track U.S asset values and debt totals for households, businesses and government. Aggregate homeowner equity appears to be stabilizing, thanks in part to the homebuyer tax credit, and total mortgage debt appears to be falling.
The following chart graphs the Fed data for homeowner equity (aggregate wealth measure of owner-occupied housing), owner-occupied housing value (gross value of the stock of owner-occupied housing), and total household mortgage debt.
The historic declines in housing prices can easily be seen in the lines for total value and homeowner equity. The value of the total stock has plateaued recently, as prices have returned to pre-boom levels and stabilized with the help of demand side support from the homebuyer tax credit.
In fact, since the 2nd quarter of 2009, homeowner equity is up more than 16% due to the relative stability in housing prices and declining mortgage debt. Nonetheless, from the peak of the market in the second quarter of 2006, homeowner equity remains down about 47%.
Deleveraging by households (reduction in total debt levels) has had an impact on total household debt levels. From the peak of mortgage debt in the 1st quarter of 2008, total mortgage debt has declined by 4.5%.
While chart reflects good news for household wealth and perhaps a future pickup in consumer spending, a significant portion of this decline may be due to mortgage defaults, rather than payments of mortgage principal. This fact is a reflection of the challenges associated with the ongoing economic recovery.