Dude, where’s my equity?

the Federal Reserve says that 7 trillion was lost in real estate values between 2007 and 2009.  What does that mean? If we look hard enough can we find it?  Is it between the cushions of the couch with the remote control? Unfortunately, the concept of value is a lot more complex than that and the missing word is “perceived”.

So what actually happened?  What actually vanished?  Actually, nothing “vanished” because the 7 trillion didn’t really exist; 7 trillion one dollar bills weren’t actually floating around in circulation and then yanked out and burned.  7 trillion was the sum of the perceived value of real estate held by the public and the lending institutions at that time.

So let’s say you bought your home in 2005 for $150,000 and you went to sell it a couple of years later;  in February 2008 a buyer put it under contract for $200,000 and the appraisal supported this.  But, let’s say that unfortunately, the contract fell apart and you had to go back on the market in September of 2008.  Now the only price a buyer will pay is $175,000.  Does that mean you lost 25K?  No, it means you got your home under contract as the market did a complete 180 degree change AND unless you had received that extra 25K in actual cash by selling at the peak, then that 25K was in theory only.

Home Equity is the difference between the total amount that is owed on a home and how much you can liquidate it for at the moment.  If you owe $150,000 on a home, including lines of credit and such, and you can sell it for 175K, then you have 25k in equity, cash in hand, if you sell it AT THIS MOMENT.  If you can only sell it for 125k and you owe 150K, then the perceived value is less than you actually paid and you now have negative equity AT THIS MOMENT.  Negative and positive equity are dynamic and are only realized when they are “cashed out” so to speak.

No matter what type of real estate market, we’ll always have people who paid more than the current perceived value; the difference in what happened in 2007 to 2009 is the sheer number of homes and the extremes between the high and the lows.  And those numbers and extremes have led to a loss of 7 trillion in perceived value, like the Federal Reserve said!

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