by Calculated Risk on 3/06/2008 02:20:00 PM

One of the headlines from the Fed's Flow of Funds report this morning was that household percent equity had fallen to a record low 47.9%. This is a simple calculation: divide home mortgages ($10,508.8 billion) by household real estate assets ($20,154.7 billion) gives us the percent mortgage debt (52.1%). Subtract from one gives us the percent homeowner equity (47.9%).

But what does this tell us?

What we really want to know is how much more equity can be borrowed on U.S. household real estate. According to the Census Bureau, 31.8% of all U.S. owner occupied homes had no mortgage in 2006 (most recent data). These homeowners tend to be older, or more risk adverse, and few of them will probably borrow from their home equity.

You can't do a direct subtraction because the value of these paid-off homes is, on average, lower than the mortgaged 68.2%. But we can construct a model based on data from the 2006 American Community Survey (see table here).

Click on graph for larger image.

This graph shows the distribution of U.S. households by the value of their home, with and without a mortgage. This data is for 2006.

By using the mid-points of each range, and solving for the price of the highest range to match the then Fed's estimate of household real estate assets at the end of 2006: $20.6 Trillion, we can estimate the total dollar value of houses with and without mortgages.

Using this method, the total value of U.S. houses, at the end of 2006, with mortgages was $15.27 Trillion or 74.2% of the total. The value of houses without mortgages was $5.32 Trillion or 25.8% of the total U.S. household real estate.

Assuming 74.2% of total assets is for households with mortgages ($14,954.8 billion), and since all of the mortgage debt ($10,508.8 billion) is from the households with mortgages, these homes have an average of 29.7% equity. It's important to remember this includes some homes with 90% equity, and 8.8 million homes with zero or negative equity (8.8 million estimate from Mark Zandi at economy.com).