Americans' home equity falls to near record low

Falling home prices have shrunk equity so much that the proportion of their homes that Americans actually own is near its lowest point since World War II.

Average home equity plunged from more than 61 percent at the start of 2001 to 38 percent 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.

The Fed's quarterly report shows how much wealth, or net worth, Americans have gained or lost. Americans' overall net worth grew 1.65 percent in the January-March period, to $58.06 trillion, because of stock market gains. Stock values as measured by the Dow Jones U.S. Total Stock Market Index gained $970 billion last quarter. But since then, they had lost $651 billion through Wednesday's stock market closing.

Auto loans, student loans and other consumer credit rose 2.4 percent — the second straight gain after nine consecutive declines. But analysts say the increase is driven by more people, many of them unemployed, borrowing money to attend school.

Average household wealth rose to $517,614 last quarter. It has risen nearly 19 percent from its early-2009 bottom. But it's still about 11.5 percent below its peak in mid-2007.

Debt now accounts for 119 percent of disposable income — down from a peak of 135 percent in late 2007. Many are reducing their mortgage debt because they're going into default on their payments and losing their homes to foreclosure.

"A lot of this debt reduction is not voluntary," said Dana Saporta, director of U.S. economics at Credit Suisse. "It's due to foreclosure activity."

The average household owes nearly $119,000 on mortgages, credit cards, auto loans and other debt, according to an Associated Press analysis of government data. That's down from more than $125,000 in 2008.

Normally when people pay down their mortgages, they see their home equity rise. But since the housing bubble burst in 2006, prices have fallen more than they did during the Great Depression. In many cases, people are paying off mortgage interest and losing equity at the same time.

There are 74.5 million homeowners in the United States. Nearly 25 percent of those homeowners are "under water," which means they have negative equity in their homes, according to the private real estate research firm CoreLogic.

Home prices are expected to keep falling until the glut of foreclosures for sale is reduced, companies start hiring in greater force, banks ease lending rules and more people think it makes financial sense again to buy a house. In some areas of the country, that could take years.