No wonder the housing market is so messed up...

I'm often puzzled about the housing market - how so many people evidently bought houses with no idea that they would be expected, at some point, to pay for them. How people signed up for mortgages with teaser low interest rates that go up, or adjustable-rate mortgages, or interest-only mortgages that change to requiring principle payments - and have no idea what they just agreed to, and find themselves surprised by terms they agreed to.

But I've come to the conclusion that when it comes to housing, nobody has any idea what they are talking about. Even smart people, people who should know what the words they are using mean, people who are telling people about the housing market.

I had this revelation tonight at the gym. I was on the Precor, listening to Brother Ali on my Zune, trying to avoid gawking at the bouncing cleavage of the blond on the treadmill next to me, and watching the closed captions on the NBC Nightly News on one of the flat panels - where Brian Williams informed the American news-watching population that "for the first time in history, the amount of debt, the amount of money that Americans owe on their homes now has exceeds the amount of equity in American homes. That means we Americans now owe more on our homes than they are worth" (The clip is here.

Except it doesn't mean that at all. This AP Article does a much better job of explaining what debt and equity means - Home equity is equal to the percentage of a home's market value minus mortgage-related debt.

In other words, if you buy a house for $100,000 and put $10,000 down, you have 10% equity in your house - and debt of 90% of the home's value.

In a way, comparing debt to equity as a percentage is meaningless. Even the most financially prudent person rarely puts more than 20% down on a house, and the first years of even a traditional fixed-rate mortgage are spent paying mostly mortgage, so it's not unusual for people to have considerably less than 50% equity in their house. Throw in the number of alternative mortgages that require little or now down payment, the large number of first-time homebuyers in recent years, increased trading-up by buyers, and the popularity of using home-equity loans, which decreases the amount of equity (but can make sense to use, since the interest is tax-deductible and interest rates are lower than unsecured debt) and it's easy to see why the number has decreased.

That's not to say that the housing market hasn't contributed - falling home prices mean lost equity. And there are plenty of people who are upside down in their houses - who really do owe more than the house is worth. But that means that that their debt PLUS their equity are less than the amount they owe on the house.

But if they got their information on housing from NBC news, it's easy to understand how they ended up in the situation.

EDIT - I posted this on a forum, and someone pointed out that what I heard on the news wasn't on the clip. I'm fairly certain I saw (closed caption) what I thought I saw, and I replayed the clip several times to get the wording right. Either I'm crazy (entirely possible, but I can't imagine I would have thought I heard that) or NBC edited the clip. It followed the ...exceeds the amount of equity in homes" and was before the part about foreclosures increasing. It was while they were showing the two monopoly houses with debt and equity, so it could have been cut without being noticeable.