House equity is only being sucked away if they are trying to sell heir house, and once agreed to it being sold, sell it for a value less than the outstanding loan amount left on their mortgage. If you aren't selling the house you aren't losing any equity value.
95% of all loans are being paid. 3% are 90 days late. 2% are being foreclosed. In historic terms- its normal.
About the only people actually taking a equity hit, are house flippers who bought high on the expectation of selling high & people who incompetently took on more debt in purchasing a home than they could afford.
Case in point, when we went to shop a loan for our current house four years ago, the approval prelim came back and we were told that we could afford a $500,000 mortgage. We laughed our buts off when we heard that. We knew what our cash flow was, what our budget was, and what we could reasonably afford in a worse case scenario. We took a loan out for $160,000K plus closing costs out the yazoo.
After pouring approximately $40,000 into our house, we have scene its actual market value put it between $230-240K. Meaning in terms of equity on our home we probably have $60,000 in equity on the property right now. We have not opened a line of equity credit, nor do we plan on selling any time in the near future. So in a real sense, over the past four years we have poured 40K into a mortgage/property taxes & 40 K into home repairs/ improvements.
We could have dumped that 80K into things like investments or simply having fun and saving money by renting a house for far less. I don't think we are an exceptional circumstance either. We certainly aren't dealing with a cash flow problem even though it hasn't changed in four years. If anything our expenses have repeatedly turned out to be unexpected things like water heaters and walls.
I simply don't think a lot of people know what debt is. Or equity. Or loss, profit--- or even how the money pool functions at all. Those that don't are among the 5% of mortgage owners country wide who are now finding out that just because you qualify for a McMansion 100% financed- does not mean you should sign the closing papers on such a house.
As your quote indicated, and you even emphasized the "Money" part of it, most people do exactly what your quote says. They do not understand what equity is. My equity in my house is properly termed, only the amount of the mortgage I have paid off. All improvements made to the propert have been funded without any loans. IE we saved cash for each project, and then paid for them outright. In a very real sense those purchases are adding to the equity of the home- but only if the mortgage is paid off.
Many people- lots of them being idiotic, looked at market values and took out equity lines of credit based upon the potential sales value of their properties. They then used this creit line to purchase on credit improvements to their homes. The problem is that these improvements are credit purchases. They may improve the over-all salebility of the home, but for them to be considered equity, one would have to first pay off the equity line and second also manage to sell the house at a price level that covers both the original mortgage and also the cash purchase price of whatever improvements they purchased with the equity line.
If your credit goes south, or the market values fall, or the market becomes a buyers market, anyone who made equity line purchase improvements would have to be extremely lucky to break even or even net an equity profit on a final sale.
The true equity value of a house is only reached in one of two ways. Way one is you look at it as a long term investment and take a couple decades to pay off the mortgage without adding on equity lines or churning your loan. The other way is to opportunistically sell the house on terms that far outweigh the mortgage costs left on the house while also being able to purchase a replacement home for less than the original home you sell.
Most people instead look at their houses as virtual piggybanks. They assume that since the local market sales price has increased, their properrty must also be worth that much. So they assume that they can afford second mortgages or equity lines.
It is an idiotic theory, especially if it is your primary home.
Right now I have 40 K off my primary mortgage. Assuming I could sell the house for the original purchase price, I'd take out 40k in equity. But in order to make it a good sale, I'd have to be able to find a very simular house for 40K. Something which is entirely doubtful and next to impossible. The longer I hold this house and keep paying for it, the higher my take vs original mortgage sale price will become. First because inflation will negate some of the up front quoted price. Second because the closer to term the mortgage gets, the more advantageos the value of the mortgage becomes.
Eventually, once the house is paid for, which would incidentally be about the time my kid gets ready for college, I will have only a property tax as a liability against the property. If I need to purchase tuition for my kid, I will be able to access the equity in the house by taking out a new first mortgage. The difference however in valuation at that time will however be based on both market values & the results of all the improvements I have made. Only then will the equity value for example of installing a new kitchen from the studs up get included in the valuation.
Most people assume that since they can get an equity line, they should. They assume that their home improvements are instant equity in their home. It isn't the case.
A lot of people made that mistake, so 5% of the mortgages held in the USA are going belly up.
Its not true in every circumstance, but most of the people in mortgage trouble are there because they are/were idiots due to the simple fact that they understand equity as a real estate agent defines it vs. what an accountant undersands it to be.
Failure to take those steps is indeed idiotic. People in general take more time and effort to research consumer electronics purchases than they do when buying real estate. Do you assume that your home theater system, video display, computer, and service provider will all seamlessly integrate because they are part of the electronic entertainment industry? Do you just assume everything will work as represented without doing any research? Without consulting with salespeople? Without looking at multiple manufacturers? Without visiting multiple retailers?
To make such a purchase in that manner simply invites easily avoidable problems. There are indeed many people who bought HD-DVD systems without doing much homework, trusting the industry to work seamlessly. Had they done even a marginal effort at research on whether to buy a HD-DVD or Blueray based video-data disk playback system, they would have easily come to the conclusion that Blueray was the most likely winner in the industry standards race. Those who did aply effort have Blueray systems. Those who didn't and bought an HD-DVD system in the last year or so just got impacted by what amounts to a market collapse. HD-DVD was dropped.
In the same way, those who jumped on the bandwagon of buying homes in markets of ever increasing property values even though they did not understand they purchase are now finding themselves being responsible for continuing to pay off something they bought without regard to being informed consumers. So do these people deserve a Federal amnesty? Do the people who bought HD-DVD systems deserve a Federal amnesty?
There isn't much I am missing on this issue that needs to be addressed. The issue is consumers not doing their own due diligence, and are now paying the penalty. It is really only an issue right now because it has become a political issue. Two candidates are offering and forebarances to prevent any foreclosures for up to 6 years. One candidate is describing the situation correctly as being little more than a statistical blip in terms of historic foreclosure rates & advises that the market is already correcting itself.
Where was the demand for amnesty and forberances in the 1980's when people had 12% mortgage rates and 3% were being foreclosed?
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