DESPITE THE BEST EFFORTS OF WALL STREET, most American household wealth still lies in the appraised value of their homes. But a new report titled “A House of Cards” suggests that the bedrock of family wealth has begun to crumble.
The report, published by Demos, a public policy group based in New York, notes that over the last decade, homeowners have borrowed increasing sums against the value of their homes.
Home equity used to fund renovations, automobiles, and other big-ticket items, but now, most of it is bridging the income gap needed for health care, housing, credit card debt, and basic living expenses.
The study's author, Javier Silva, notes that this is a dangerous game because, at the same time, home appraisal fraud is rampant, and many people are living in homes that may be worth far less in real dollars than they are on paper.
That scenario can lead to something called “upside down” debt. In this situation, the homeowner borrows a lot of equity while home prices are inflated, only to owe more than the value of the house as prices fall. Homeowners most at risk if the housing bubble bursts, the report says, will be those in areas where housing prices have appreciated most dramatically, such as the Pacific Coast (up 74.2 percent over the last five years) and the Northeast (a 60.6 percent rise over same period).
The report falls short, however, when it tries to offer suggestions for how such a crisis might be averted. Instead of bold ideas for addressing the root problems of declining wages and a skyrocketing health care system, the author urges greater control over credit card lending and avoidance of appraisal fraud.
Sources: Federal Reserve; U.S. Census Bureau