Home Price Declines Lead to Drop in Net Worth

Many middle to low income consumers put everything they have into obtaining homeownership which has and still remains the American Dream. The turn of economic events that occurred several years ago brought this use of any funds to a halt for many people. For those who were already homeowners, there was shock at the realization that their major asset had lost value and continued to do so for several years. The Federal Reserve Board's Survey of Consumer Finances (SCF) for 2010 reported this week that, although other financial declines occurred, home price declines led to a major drop in net worth for many consumers.

According to the survey, the median net worth fell 38.8% between 2007 and 2010. During these three years, net worth dropped from $126,400 to $77,300 which levels have not been seen since 1992. Declines in the value of financial assets and/or business were substantial for some families since many consumers are able to diversify their asset holdings in portfolios. However, it was found through the survey that the median net worth decrease was driven strongly by the collapse in home prices especially for those where housing represented a large share of their assets. The Fed's survey revealed that middle-class families face limited ability to spend since they had experienced the largest percentage of loss in both wealth and income during those three years.

While some forms of wealth, such as stock portfolios, have recovered some of the losses since the survey, housing has not done the same. With home prices still low, the only way to recoup some of the loss is through refinancing. While many consumers can obtain a traditional mortgage refinance, there are others who cannot because of employment issues, income or debt issues or just because the mortgage amount is higher than the value of the property. For this reason, several mortgage programs have been initiated to help consumers begin to gain equity back in their property at a quicker pace. For example, consumers who are seeking conforming mortgage refinances through HARP are being encouraged to switch to shorter term loans, such as a 15 year fixed rate mortgage, so that they will build equity faster, possibly in as little as 3 years. When housing is the main asset, the equity in the home minus debt equals the net worth. At the same time, the FHA streamline refinance with no cash out is offering borrowers an FHA refinance to lower mortgage rates with drastically reduced upfront and annual mortgage insurance premiums. A lower monthly mortgage payment puts extra cash in a borrower's pocket that can be used for investing which can increase net worth, or spending which promotes economic growth. Both of these programs are also meant to help borrowers avoid default or foreclosure which could decrease home prices further. These mortgage refinance enhancements, HARP and FHA streamline refinance, are creating a surge in mortgage applications, so much so, that many big banks will only deal with their own customers. However, borrowers can still obtain any type of mortgage refinance, including HARP and FHA streamline refinance, that they are seeking right online with little effort or time required.

Many of the hardest hit areas where home prices fell dramatically, such as the South, are also experiencing a high number of applications for mortgage refinances. While mortgage refinances will help consumers put money in their pocket and, in some cases improve equity, more home purchases are needed in order for home prices to begin increasing again. When this happens, those who struggled to keep their homes throughout these difficult years will begin to see their net worth replenish again.

FreeRateUpdate.com surveys more than two dozen wholesale and direct lenders' rate sheets to determine the most accurate mortgage rates available to well qualified consumers at a standard 0.7 to 1% point origination fee.