Hot Housing Market Drives Rise in Homeowners Equity

The red-hot American housing market is paying off for many homeowners, even those not looking to sell their home.

On average, homes with a mortgage earned $ 26,300 in equity in the last three months of 2020 compared to the year before, according to real estate information company CoreLogic. That average profit is the highest since 2013, the firm said.

CoreLogic said that homes with a mortgage account for about 62% of all US properties. Collectively, the home equity for those properties rose to more than $ 1.5 trillion, a 16.2% increase from the prior year.

The increase in homeowners ‘net worth can have a positive impact on borrowers’ finances; On the one hand, it creates a buffer against potential financial difficulties, such as job loss. And homeowners could choose to use some of the proceeds, giving the economy a boost.

“In our view, these strong capital gains are a clear positive for homeowners’ balance sheets, as well as overall additional consumer spending, should homeowners want to take advantage of a portion of their capital gains,” Jonathan Woloshin, real estate and lodging analyst. at UBS, he wrote in a research note last week.

Rising home values ​​and low mortgage rates prompted many American homeowners to refinance and collect part of their home equity last year. Homeowners withdrew $ 152.7 billion in equity, a 41.7% increase from 2019 and the highest cash refinance amount since 2007, according to mortgage buyer Freddie Mac.

Homeowners also took advantage of their home equity through a home equity line of credit, or HELOC. HELOC volume more than doubled in 2020 from the prior year to $ 74.9 billion.

Low mortgage rates, strong demand and a record inventory of homes for sale across the country have driven home sales and raised home prices since last summer.

Sales of previously occupied American homes rose 5.6% in 2020 from the previous year to 5.64 million, the highest level since 2006 at the height of the housing boom, according to the National Association of Realtors. Median home sales prices nationwide rose 12.9% to $ 309,800.

Strong demand for homes continued in January, and sales were up 0.6% from December and almost 24% from the previous year. However, at the end of January, the supply of homes in the market nationwide fell to a record low of 1.04 million units. That equates to a 1.9 month supply. A balanced housing market tends to have a 6-month supply. The group of realtors will release their February home sales data next week.

When home equity increases, you reduce the risk that a homeowner with a mortgage will end up “drowning” in their loan, meaning they owe more on their mortgage than their home is worth. That can happen when the value of a home decreases or when the size of the mortgage increases, for example, when someone takes out a home equity loan.

Homes in California, Idaho and Washington saw one of the largest average annual capital gains increases in the fourth quarter: $ 54,500 in California, $ 48,500 in Idaho and $ 47,000 in Washington state, CoreLogic said.

Even a robust housing market with rising prices cannot limit the risk of a homeowner ending up completely mired in their home loan.

In the fourth quarter, some 410,000 US residential properties were underwater on their mortgage, according to CoreLogic. That’s a 21% decrease from the same period in 2019, when 1.9 million homes, or 3.6% of all properties with a mortgage, had negative net worth, the firm said.

Miami, Miami Beach and the suburb of Kendall, Florida, had a negative average home equity share that was among the largest nationally at 6.3%.

Underwater mortgages at the end of December represent approximately $ 280.2 billion in mortgage debt, down 2.6% from the prior year, CoreLogic said.

When a mortgage is under water, the homeowner is often unable to qualify for mortgage refinance and has few resources to keep making payments in the hope that the property will eventually recover its value.

Many economists expect home prices to continue rising this year, which bodes well for homeowners with sunk mortgages. If US home prices rise 5%, then about 216,000 homes would regain equity, CoreLogic said. If the opposite occurs, nearly 300,000 homes would fall to negative net worth, the firm said.

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