The Perfect Financial Storm ...

According to a report that made the news today, American’s home equity has fallen to below 50% for the first time since the statistics have been gathered in 1945. The total estimated home equity of all homeowners is roughly $9.5 trillion, or barely 50%. This puts the Federal Reserve in a very tough spot.

Why? If unemployment were to tick up, foreclosures might create a vicious cycle that eventually led to a horrible economic situation as the dominoes fell. In a perfect storm, more and more people would lose their home, stop paying their credit cards, causing more write-downs on Wall Street, stocks fall further, investor’s lose money in their portfolio and panic, selling already depressed equities, leading to further price drops, layoffs, etc.

If, on the other hand, the Federal Reserve does not raise interest rates, inflation could spread like wildfire through the system, slightly helping those who are heavily in debt but hurting those who have been prudent and built their wealth. In other words, it looks like the nation is walking a tightrope right now with people’s financial lives on the line.

You might want to read Why Building Equity at the Expense of Liquidity Can Lead to Bankruptcy to see why it might be prudent in some cases to pile up cash to ensure you can make your minimum required payments.