Falling home prices have shrunk the equity Americans have in their homes to nearly the lowest percentage since World War II.
By Scott Olson, Getty Images
Average home equity plunged from more than 61% at the start of 2001 to 38% in the January-March quarter this year, the Federal Reserve said in a report Thursday. That drop comes as home prices in big metro areas have reached their lowest level since 2002.
Prices fell 33% in 20 cities through March from their 2006 peak, reaching their lowest level since 2003, according to the Standard & Poor's/Case-Shiller index of U.S. home prices on May 31. The decline signaled a "double dip" as the index fell below its previous post-housing-bubble low set in April 2009. Prices more than doubled from 2000 to July 2006.
Further declines in home prices are likely.
Robert Shiller, the economist who co-founded the S&P/Case-Shiller index, said a further decline in property values of 10% to 25% in the next five years "wouldn't surprise me at all."
"There's no precedent for this statistically, so no way to predict," Shiller said Thursday at a Standard & Poor's conference in New York.
A backlog of foreclosures poised to hit the market means prices may stay depressed, dissuading builders from starting new construction.
Unemployment, which rose to 9.1% in May, and stricter lending conditions are signs that any recovery in housing may take years.
Shiller's comments paint a more pessimistic possibility for home prices than other forecasts. Additional declines will be "incremental," Bank of America CEO Brian Moynihan said last week..
While it would be a surprise to see prices fall steeply, it's possible for homes to lose more value if inflation picks up, Karl Case, co-founder of the index, said Thursday.
"You could have flat nominal prices but still have it go down 20%," Case said during an interview at the conference.
"If house prices stabilize, they could still go down in real terms. If we had inflation, it'd be great, because it'd mask a 25% decline."
The Fed report showed that household debt fell in the January-March period at an annual rate of 2% from the previous quarter.
That drop was due entirely to a decline in mortgages.
Auto loans, student loans and other consumer credit rose 2.4% — the second-straight gain after nine consecutive declines.
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