The market value of homes owned by U.S. households rose by 6.3% during 2006 to a record $20.6 trillion at year end — according to recent Federal Reserve estimates. The “holding gains” (excluding net purchases) came to 4.8% over the course of 2006, down from 10.7% in 2005. The annualized holding gain for the fourth quarter of last year was down to 3.0%, reflecting the progressive deceleration of national house price appreciation from peak rates recorded in the latter part of 2005.
Home mortgage debt rose by 8.9% during 2006, down from the extraordinarily rapid rates of 2004 and 2005, but still quite robust. Household equity in homes rose by 4.0% over the course of the year to a record $10.95 trillion at year end, although the annualized gain came to less than 2% for the fourth quarter. Furthermore, the debt-to-value ratio moved up to 46.9% by the end of 2006, continuing the upward trend of recent years.
The weakening of house prices is likely to continue during 2007, causing housing wealth and housing equity to stagnate, and possibly even decline, and the debt-to-value ratio is destined to rise somewhat further.
While not alarming, these developments inevitably detract from the investment aspects of homeownership and reduce the degree of support provided to consumer spending by housing wealth accumulation.
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