Home Equity at Record Low; Still a Buyer’s Market

According to a WSJ analysis of the latest Federal Reserve Bank Data, American home equity is at rock-bottom. “As of March 31, owners’ equity accounted for just 41.4% of real estate values. The levels are the lowest on record, and of course they are far below those which were standard a generation ago.” The chart below, courtesy of the WSJ, shows how in only 50 years, average home equity declined from 75% to the current level.

The implication is clear: it’s still a buyer’s market. “Many potential sellers have a desperately weak hand. And many potential buyers lack enough equity in their current home to trade up.” In other words, sellers don’t have any leverage (in the figurative sense), and competition among buyers is limited, to non-existent. In fact, the decline means that many homeowners now have negative equity in their homes, and they are bound to be the most desperate from considering offers.

Some analysts are using these trends as a basis for encouraging investors/buyers to get back into the market. “If a real estate investor can pick up a property for 55 cents on the dollar, fix it up for another 15 cents on the dollar and sell it to a first time buyer for 80-85 cents on the dollar, everybody is happy. The investor perceives this is a good profit margin.” And some investors are doing just that. For several months now, there have been growing reports of bidding wars, featuring above-list price, all-cash offers for distressed properties.

In a recent article, one columnist even invoked the cliche about how real estate is a more sound investment than stocks/bonds because it is tangible. “Not all investments are the same. You can’t live in a stock certificate or gaze wistfully at a bond (at least most of us can’t). In what is still a time of tumult, there’s something deep inside us that finds the solidity of a home soothing. I think that explains why people moving out on the risk scale are focused more on real estate than on stocks or bonds.” Wasn’t this the attitude that led to the housing crisis in the first place?

It’s arguable a good time to by real estate, given the record decline in prices and mortgage rates that remain temptingly low. But the main rationale for buying should ultimately be based on utility, rather than capital appreciation.