Earlier today the Federal Reserve noted that American home equity has fallen below 50% (the lowest it’s been since 1945). As a whole, homeowners owe more on their homes than they have paid off.

Many news outlets have picked up the story, some indicating that the new statistic is a result of a declining economy. The truth is more complicated, however. While homeowners do have less equity, they also own property at significantly higher values than those of a decade ago. (See this chart from the New York Times).

The MSN MoneySmart Blog shares further insight from Michael Rizzo, a senior economist at the American Institute for Economic Research:

“We contacted Rizzo with a couple of questions, and here’s what he had to say: “I just wanted to point out that 60 years ago, homeowners (in aggregate) owned a large percentage of a small pie and while homeowners’ share of the pie today is much smaller (leverage making up nearly half of housing values), the pie is substantially larger. Would you rather own 80% of $800 or so billion or 50% of $5 trillion? The point is to get people thinking.”

That certainly provides a new perspective for those concerned about the home equity situation.

HELOCs and home equity loans may be to blame for some of the shrinking equity. Other causes include high home costs and the low down payment options available during the recent housing boom.

See Also: How a HELOC Works

Tags | Heloc, home equity, home equity loan, lenders, loans, real estate