How a Small Change in Home Prices Destroys Wealth

I generally try to keep these posts related to technology, gadgets and the like, but I couldn't resist a little delve into economics.

A couple of days ago, it was announced that home prices fell 4% nationwide in 2010. Better than some years, worse than others, but it occurred to me that a lot of people fail to realize the practical implications of a decline in home values.

It goes without saying that most people in America don't own their homes, their banks do.  If we actually owned our homes, we would not have had the subprime mortgage crisis at all, or the government bailout of Fannie, Freddy, AIG and scores of other banks.  This is important to keep in mind.

So, if we accept that banks own the homes, and "Homeowners" have "equity" in their homes of say, 20% for sake of argument.  Let's see what happens when home values go down by 4% in one year.

Home value at the beginning of 2010: $200,000
"Homeowner's Equity" at the beginning of 2010: $40,000 (individual asset)
Bank receivable (mortgage) at the beginning of 2010: $160,000 (bank asset)

So, in 2010, home value drops by 4%, or $8,000.  Assuming no repayment of mortgage principal, and neglecting the cost of taxes, insurance, interest and maintenance, here's where you end up.

Home value is now $192,000
"Homeowner's Equity" is now $32,000 (individual asset)
The bank receivable (mortgage) remains $160,000 (bank asset).  The mortgage is not devalued at all, you still owe the entire amount, regardless of what your home is worth.

So the "Homeowner" has lost $8,000 on their original cash investment of $40,000, or a whopping 20% in one year.  The bank hasn't lost a thing, but the wealth of the individual "Homeowner" has taken a very serious hit.

Maybe this is perfectly obvious to everyone, but for some reason, I just don't think it is.  Unless you actually own your home, the loss on the asset is magnified by the leverage (mortgage) employed to acquire the asset.  The "Homeowner" takes the loss on the entire asset while "owning" only a small fraction of that asset.  It is the American people who bear the risk in this transaction.

Home ownership is identical to purchasing stock on margin.  Few people have the risk tolerance or sophistication to sell uncovered options or buy stock on margin.  How is it that home ownership somehow persists as a cornerstone of the "American Dream"?

If you ask me, home ownership is indentured servitude taken to a whole new level.  It is a huge fraud perpetuated on the American public by the financial establishment.