Home Owner’s Equity is Rising and Getting Closer to Peak

It’s taken some time but owner’s equity in real estate is rising and getting close to its 2006 peak.* The wealth of most households is in the family home so household balance sheets look to be in good shape.

See this video on the importance of owner’s equity and Vernon Smith’s book with Steven Gjerstad, Rethinking Housing Bubbles.

Hat tip: Vernon Smith.

*The graph is now corrected for inflation. My bad. Fortunately FRED makes it easy to fix. You can make your own changes by clicking customize.


I suspect Tabarrok is being ironic. Households looked to be in great shape in 2006, too. https://www.nytimes.com/2017/05/18/upshot/how-tales-of-flippers-led-to-a-housing-bubble.html Consider the consequences of another financial crisis while the country is mired in a political crisis. Oh, my! Boettke must be excited.

Way more people were swimming naked in 2006. The enormous economic pain produced by The Great Recession has seen to that.


No, the nakedness has just been transferred


So, last night I was listening to NPR, and some idiots were complaining about how terrible it was the individuals and families were taking on more risk in their financial lives, and how the solution was that "larger institutions" should take on more risk.

I wanted to smack them over the head and yell "SYSTEMIC RISK" in their ear.

I wish there were more NPR listeners like you, but then I suppose it wouldn't be NPR.

It's a bit of a distrubing graph to me (expand it out to show the full time period) but that might be due to the numbrs being nominal rather than real and I've not bothered to go look that up.

Not to be that guy, but your first sentence should end "its 2006 peak."

That guy can be pretty funny:


Howard Ruff laughed.

Not only is it unclear on whether it is nominal or real, but I presume that this is on more units than in 2006, so the equity per owner is still iikely lower? In general, though, I feel sorry for people who live in markets where housing is so expensive that they are forced to make it the majority of their net worth. In markets where that is optional, it is a poor choice to select a house that forces one's budget to make housing the majority of net worth. Owning a house with a mortgage is an act of leverage, with the gross price--not the $ of home equity-- of a house the relevant value for computing portfolio percentage devoted to local real estate.

In addition, it forces the person who buys in to enthusiastically support the local NIMBYism. It's extremely difficult to reverse a housing price run up once it has occurred without an incredible amount of pain. Never letting prices shoot up to start is the only safe strategy.

The housing situation, once a powerful cornerstore of the American dream, has become sour and untenable.

This graph is meaningless.

"The wealth of most households is in the family home so household balance sheets look to be in good shape."

How does this describe a healthy balance sheet? If over 60% of your assets are tied up in a single residential real estate property how is this a good thing? Were people not taught about diversification? Or the risks of holding illiquid assets with high transaction costs and carrying costs as your primary asset?

That's not realistic for most people.

Somebody with an average income and an average house is eventually going to end up with a couple years worth of income in home equity.

Even on a modest mortgage, the amortization schedules suggest that after a decade your monthly principle payments will exceed the contribution limits of a Roth IRA.

I find the graph more interesting with the time base expanded back to 1950. It looks like fairly smooth growth until 1990, and then huge gyrations. Since 1990, the growth of real owner's equity looks much less natural, much less predictable.

I could say that current levels look like a projection of the 1970 to 1990 line (good) but I'm not sure what confidence that should give us, when the new "regime" is peak and valley.

If you extend the time base back to 1900, 1800, or 1700 (for areas such as New York) it's even flatter.

It's hard to believe that the price and equity growth is related to anything other than artificial scarcity created by zoning, etc. The price of construction has, if anything, fallen (adjusted for size, quality), and the increasing sizes of new houses shouldn't make older houses worth more. The price of unimproved land has hardly increased by anything so much. (A comparison of lots of different sizes with similar houses makes that apparent.)

People want to live in desirable places near economic centers. There are only so many of those to go around.

They could always make buildings taller.

Most people don't want to live in tall buildings. They want to live in mid-rises or single-family homes.

People want a lot of things, life is about tradeoffs.

Or deeper which is a better strategy in the pending environmental dystopia.

I think this would be more meaningful if you switch to per-capita.

Look at the graph for the period from 1980 to 1990. The nonsense we see today can be traced back to that decade. And consider what mortgage interest rates were like in that decade! Volcker and Reagan unleashed a tidal wave, with tax cuts for the wealthy offset by tax increases for working Americans, massive deficits, rising inequality, speculation in financial markets and in real estate and recurring asset bubbles, stagnant or falling investment in productive capital, stagnant or falling productivity, and stagnant or falling wages. Yet, one political party and half the country think it a good idea to return to the good old days of the 1980s. Cowen should ask Sen. Sasse if he'd like to return to the good old days of the 1980s.

You mean 1990-2000?

Up to 90 seems to be pretty consistent, then a nudge down for the '88 recession, not odd. Then, flat - odd. Then huge rise. very odd. Like someone/thing intervened to get things going again and way overshot.

Only if one realistically can repay the loan and has a rational use(s) for the funds should one use her/his home as an ATM. In my case, estate and tax planning are motives. A possible good use of home equity lines/loans could be to pay off high-interest rate credit card debt.

Or, parents repay your kids' high-rate student loans and have them repay you at prime.

Unless you can make the monthly payments, using the ATM/house to buy a new Beamer or a sport fishing boat probably isn't a good idea.

As in the run-up to the 2007 real estate crash, asset values (then residential real estate, now RE values and equities) are soaring without concomitant GDP growth or median family incomes increases.

In addition to collateral protection, there are four other, more-vital factors in borrowing/lending decisions. Capacity to repay, without resorting to collateral liquidation, is far more vital than ephemeral appraisal values.

We should have learned (2009 was the hard way) that when an asset bubble bursts, collateral values crash and are not available to mitigate loan losses.

My understanding is that the volume of saleable houses is low compared to demand.

Other financial news that ought to be consulted. Total U.S. household debt was $12.73 trillion at the end 1Q2017, up $473 billion from PY. QTR survey: household debt delinquency rates steady at 4.8% (not as high as 2009, but still worrisome). NY Fed - over 11% student loan debt “seriously delinquent” a/o 3/31/2017. Auto loan and credit card delinquency are rising, and default rates for student loans ($11 trillion?) remain unsatisfactory and unacceptable.

At the peak of the housing mania of 2005, home equity withdrawals exceeded 8% of disposable income in the US.


Three years ago the Smith/Gjerstad book predicted that when (and only when) as homeowners rebuilt their balance sheets would the economy recover. Nothing to do with Trump's election (or in the alternative universe Hillary's election.)

Tabarrok buying into the notion of the family home as a financial asset?

Good God. A house is a place to live & to raise a family.

What a nong.

so uh correcting for inflation is kind of a big deal...also the home equity gains are extremely uneven across income and geography. the general direction of this post here is inaccurate.

I am not a huge fan of that metric shown in the chart. Housing equity is important from a credit perspective, but only if you look at the data in highly disaggregated form. For example, share of mortgage loans with negative or very low equity, etc.

From a wealth perspective, debt is fungible. If I have a little mortgage debt but am up to my eyeballs in consumer credit, then I may not view my house -- or more to the point myself -- as being in the clear and wealthy. Converse, involving non-housing assets, holds as well, I think.

Not to be alarmist about a bubble or the economy or whatever, but just commenting on the value of that metric itself.


Zero Hedge (ZH) blog - From the Fed's annual "household well-being report" a quarter of Americans can't pay all their monthly bills; 44% have less than $400 emergency funds.

ZH - perma-bear - thinks housing prices were boosted by private equity inflows, not real demand . . . I dunno.

Barron's 22 May 2017: Flattening yield curve: recent Two- and 10-Year spread down to 96 bp, or lower by 40 bp, from its peak before YE 2016. Flattening yield curve signals expectations: slow growth, rising rates, inflation.

Barron's 18 May 2017: Total U.S. household debt was $12.73 trillion at the end 1Q2017, up $473 billion from PY, and above housing bubble peak. QTR survey: household debt delinquency rates steady at 4.8%. NY Fed - over 11% student loan debt “seriously delinquent” a/o 3/31/2017. Auto loan and credit card delinquency are rising, and those for student loans remain unsatisfactory and unacceptable.

Not to throw water on the fire, but . . .

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