Homeowner Equity

In a 3/13/09 WSJ report by S. Mitra Kalita: the Federal Reserve announced that Americans had seen their net worth fall by $11 trillion, or 18%, in 2008. However, a historical perspective is still positive for those adults who have been building equity over the past two decades. “Not accounting for inflation, household wealth more than doubled from 1990 to 2000, and then, after a pause, rose nearly 50% before the bust of 2008.”

But many have not been building equity for two decades. Real estate, primarily their house, accounts for 35 – 40% of the total wealth of most households. Those who invested their house equity in a larger home, or who borrowed against that equity, have watched that equity disappear. The Fed reported that, at the end of 2008, homeowners collectively had only 43% equity in their homes, the lowest level since 1953.

In 1990, Americans had 14% of their wealth in stocks. By 2000, stocks comprised 33% of wealth, slightly more than Americans had in their homes. It was paper wealth. The collapse of the dot.com bubble and the recession after 9/11 “downsized” that stock wealth substantially. In July 2002, the average American retail investor had lost all the stock profits they had made during the 1990s.

The lesson: diversify. As stocks rise, take the money “off the table.” Stocks and houses do not rise in value indefinitely.

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