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Sunday, December 20, 2009

Fed's Flow of Funds now using LoanPerformance Index

by Calculated Risk on 12/20/2009 11:48:00 AM

UPDATE: Originally I thought the Fed switcehed to Case-Shiller. In fact they switched to LoanPerformance, see: Flow of Funds: Change in House Price Index

From a newsletter by John Mauldin:

Frank Veneroso noticed something unusual in the latest Federal Reserve Flow of Funds report. They changed their methodology for analyzing housing prices to a model more like the Case-Shiller index, which most believe to be more accurate. That meant they deducted another $2 trillion from household net worth than in the previous quarter. They just caught up with reality, so no big news there. But there is some big news if you look closely.

About one-third of the homes in the US have no mortgages. Typically, these are nicer homes, as the "rich" have paid off their homes. So you can estimate that to be somewhere between 35-40% of the total value of US homes. Writes Frank:

"So now the flow of funds accounts tell us that the total value of residential real estate is $16.53 trillion. The share owned by households with a mortgage is probably $10 trillion to $11 trillion. Total mortgage household debt now stands at $10.3 trillion. In effect, for all households with a mortgage taken in the aggregate, their loan-to-value ratio is now close to 100% and perhaps close to half of them have a zero to negative equity."
On the first point the Fed is now using the Case-Shiller LoanPerformance (update) index for the Flow of Funds report, as opposed to the FHFA index. This change happened in the Q3 Flow of Funds report.

The second point is probably a little inaccurate. According to the most recent American Community Survey, approximately 31.7% of homeowners have no mortgage. Although the "rich" frequently have no mortgage, homeowners without mortgages tend to own less expensive homes than homeowners with mortgages.

Homes with and without Mortgages by Value Click on graph for larger image in new window.

This graph is based on the American Community Survey data for homeowners without a mortgage, and for homeowners with mortgages.

The median value (not average) of homes without a mortgage is $148,100, and the median for homes with a mortgage is $214,400.

My estimate is that homeowners without mortgages own about 26% of all household real estate (by value), and this suggests homeowners with mortgages have about 85% loan-to-value in the aggregate. This includes homeowners with 90% equity (almost paid off), and homeowners with substantial negative equity.

Negative equity is a serious problem, but according to First American Core Logic, about 23% of homeowners with mortgages have negative equity - and that is probably closer to the actual number.

Note: here is much more on negative equity with several graphs.

It is interesting the the Fed has switched to Case-ShillerLoanPerformance!