Dear Kent – Home prices in Austin feel like they are continuing to rise, but so do mortgages. Are we building equity or eating equity? - Trevor

Slipping.

I’m no economic rocket scientist, but according to the Federal Reserve at the end of the year 2000, home mortgages totaled $4.81 trillion, and our homes were collectively worth $11.42 trillion — which meant that we had a collective 58% equity, 42% debt. (From the Federal Reserve Flow of Funds report, table B.100 which shows balance sheets of households including home equity lines of credit)

At the end of the first quarter of this year 2007, the home mortgage totals were $9.8 trillion, and our homes collective net worth was $20.8 trillion — that equates to a collective 53% equity, 47% debt.

So Americans are cannibalizing their homes by slowly siphoning their equity. If the trend continues on its current path, in another 7.5 years, the glass (house) will be more than half-empty. In other words, the percentage of debt on our homes will be more than 50%.

If a buyer just bought a house and put down 10%, 15% or 20%, they may think “so what, 50% equity looks pretty good to me!” but it’s a disheartening American trend. The payments we make on those mortgages include interest costs, money that we could be better used in other areas like educating our children, starting a new business, assisting those less fortunate, preparing for retirement and so on.

Thanks, Trevor, for the question!