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The relationship between homeownership and net worth

I have my own spin to put on the news that sales of existing homes plunged 27 percent in July: Stop thinking of your home as your cash cow.

In the last several decades, borrowers have heavily leveraged themselves using their houses to buy the things they've wanted - cars, vacations, college educations, better kitchens or bathrooms. That's one of the advantages of entering into a mortgage for a home. You can still use the home as collateral to borrow more money.

But an estimated one in seven homeowners now has a home worth less than what they owe on their mortgages, and nearly five million need their home prices to rebound by 25 percent before they are back above water, according to a report on the "State of the Nation's Housing" released earlier this summer by the Joint Center for Housing Studies of Harvard University.

With the rise in foreclosures and the decline in housing sales, we should be recalculating how homeownership fits into our net worth and, more importantly, how we view homeownership.

How much of our housing wealth is really net wealth?

Housing wealth represents a large component of total family wealth, according to the most recent data compiled in the Federal Reserve's Survey of Consumer Finances. In 2007, the primary residence accounted for 31.8 percent of total family assets.

You calculate your net worth (or wealth) by adding up the value of all your assets and then deducting all your liabilities. With a house, you deduct the amount you owe on your mortgage (liability) from the approximate fair market value of the property. By the strict definition of net worth, if your home's estimated market value is more than what you have in the bank, then you have equity and that equity is considered an asset and goes on the plus side of your net worth.

During one of my recent financial talks, I asked all the homeowners to stand.

In the room of a few hundred, about 40 percent of the people rose. Then I asked how many of those standing had a mortgage on their home. If they did, I asked them to sit down.

Only a few people were left standing.

By the looks on the faces of the people who had to sit down, it was a classic aha-Oprah Winfrey moment.

You see, if you have a mortgage, home equity loan or line of credit on your home, you are not really a homeowner. We should stop deceiving ourselves that we are.

True, you do have certain rights to a home even with a mortgage. But as many people discovered when the economy slammed into the Great Recession, if you lose your job and you no longer have the means to pay your mortgage, you quickly realise you don't own the property you so proudly proclaim is yours.

This past spring, the Federal Reserve began the process of collecting information for the 2010 Survey of Consumer Finances. The data will provide an important financial portrait of what Americans own - from houses and cars to stocks and bonds. Summary results for the 2010 study will be published in early 2012.

Families have gone through quite a bit since the last consumer survey in 2007. I'd like to see the Federal Reserve really explore how housing wealth is affecting families, taking into account the erosion of paper equity on the homes people say they own.

The National Association of Realtors' report on home sales is alarming. Seasonally adjusted existing-home sales are at the lowest level since the association began collecting such data in 1999. Single-family sales are at the lowest level since May 1995.

"Given that home values are back in line relative to income...there is not likely to be any measurable change in home prices going forward," said Lawrence Yun, the NAR's chief economist, in releasing the July figures.

Of course, the association has put a positive spin on the slumping housing sales. Yun optimistically says: "Given the rock-bottom mortgage interest rates and historically high housing affordability conditions, the pace of a sales recovery could pick up quickly, provided the economy consistently adds jobs."

When the state of the housing market improves, we need to resist going back to our old way of playing down a home as a liability. The latest home sales figures are further evidence that the so-called equity in your home isn't a sure thing on your personal balance sheet. This should be one of the great lessons from the economic downturn.

Readers can write to Michelle Singletary c/o The Washington Post, 1150 15th St., NW, Washington, DC 20071. Her e-mail address is singletarym@washpost.com Comments and questions are welcome, but due to the volume of mail, personal responses may not be possible. Please also note comments or questions may be used in a future column, with the writer's name, unless a specific request to do otherwise is indicated.

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