The media headlines have been relentless in sending the message that the residential real estate market in many areas is sinking fast. The glut of new and resale homes sitting for months without a viable buyer in sight is certainly worrisome, as is the trend of tightening underwriting guidelines in the mortgage sector. As a result of all that, prices are declining. The market is undeniably trying to find its footing again, but is it really that ill in the big picture? In the broad sense of national economics?
The Federal Reserve, or just the Fed, recently released its "flow of funds" statistics and they show that the equity homeowners had in mid-2007 amounted to a massive $10.9 trillion. It was arrived at by taking the market value of residential real estate, roughly $21 trillion, and deducting mortgage obligations of $10.1 trillion from it. This alone doesn't say much, only that it's a lot of money.
Let's go a little deeper into the issue. In the second quarter of 2007 homeowners lost $6 billion in equity when compared with the first quarter. That was expected. However, it was still $48 billion higher than in the fourth quarter of 2006. Some ground was lost, but clearly a $6 billion decline in a $10.9 trillion market is a drop in the bucket.
Another observation points in the same direction. Many metropolitan areas enjoyed surging value increases during the explosion a few years ago. Prices actually more than doubled in 33 major cities between 2001 and 2006, according to the Fed's study. That was an unsustainable period of escalation. Today, the new Standard & Poor's/ Case-Shiller home price index reports that prices are down 4.4% on average in the 20 large markets it covered. They can be even lower than that, say 10-15%, and homeowners will still keep most of the appreciation they garnered during the boom. Letting go of 15% from a 100% gain should be easily palatable.
One hard-hit city is Los Angeles where home values dropped 5.7% in the last 12 months, but are a net 88.9% higher since 2002, according to the Case-Shiller index. Las Vegas is also in the grip of a major correction and while prices are giving ground here, too, the end result is shaping up to be very similar to that of Los Angeles. Overall, as is evident, the picture isn't nearly as gloomy as the headlines make it sound.