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Home equity continues to improve nationwide

May 9, 2019

Across the U.S., rising home prices have helped lift millions of Americans out of negative or marginal equity and put them in a position to sell their properties with confidence or otherwise benefit from homeownership. That trend continued in the first quarter of the new year, as hundreds of thousands more homeowners saw their equity improve sharply on an annual basis.

"More than 14.4 million homes were equity-rich."

Through the end of March, more than 14.4 million homes nationwide were considered equity-rich, meaning their owners carried a loan-to-value ratio of 50% or less, according to the latest U.S. Home Equity & Underwater Report from ATTOM Data Solutions. While that number was up from slightly more than 13.84 million a year earlier, and represented more than a quarter of all homeowners, it's worth noting that the most recent total slid on a quarterly basis, and the share of equity-rich homeowners actually declined year-over-year.

Digging into the statistics
This change was due, in large part, to the reality that home prices aren't accelerating as quickly as they have in recent years, the report said. That issue, in fact, seems to have also contributed to a slight increase in the number of homeowners who are seriously underwater on their mortgages - meaning they owe at least 25% more on their mortgage than the property is worth. In all, more than 5.22 million homeowners fell into this category through the end of 2019's first quarter, representing about 9.1% of all properties with outstanding mortgage balances.

The total number of these properties was up on both monthly and annual bases - by roughly 17,000 and 222,000, respectively - but while there was a sharp increase in the share of homes that fell into this category on a quarterly basis, it actually declined from 9.3% from the previous year despite the larger number, the report said. That potentially indicates greater nationwide household formation between the first quarters of 2018 and 2019.

"With home prices increasing at a slower pace in 2018, than in previous years, the potential for people to climb out from mortgages that are underwater or advance into equity-rich territory, tends to be reduced," said Todd Teta, chief product officer at ATTOM Data Solutions. "However, only 1 in 11 mortgages are seriously underwater today, compared to nearly 1 in 3 during the depths of the recession."

What happens with that equity?
It should come as no surprise that as property values rise, some homeowners would prefer to tap the equity they've built up over the years than to simply cash out and sell. However, that doesn't seem to be happening at quite the rate many might have expected, according to the latest data from Black Knight. The nation's total amount of tappable equity - that is, the equity of all individual homes above and beyond their 80% LTV ratios - closed 2018 at about $5.7 trillion, down from $6 trillion just six months earlier.

"California accounts for about 60% of the whole country's lost equity."

Much of that decline was largely due to overheated markets with extremely high home prices - such as California - taking a bit of a step back, the report said. In fact, the Golden State saw average home prices fall by approximately $14,600, resulting in about 60% of the whole country's lost equity.

Interestingly, though, homeowners who did have the flexibility to tap their equity for one reason or another largely shied away from doing so in the final quarter of 2018, the report said. In all, owners withdrew roughly $61 billion in equity during that three-month span, accounting for some - but certainly not all - of the decline. The $61 billion was the lowest single-quarter total seen in almost 3 years, by volume. By margin (about 1% of available equity), it was the lowest level seen since 2012, when the market began to recover in earnest. That was also a 16% decline in withdrawals on an annual basis.

Changing trends
Ben Graboske, president of Black Knight's Data and Analytics division, noted that mortgages were still hovering well above 4% before last year came to an end, and since then, they've retreated once again. Usually, when rates decline that sharply over a relatively short period of time, that leads to a spike in owners tapping their equity with home equity line of credit or cash-out refinances.

"Heading into Q2 2019, the 30-year fixed rate stands at 4.3%," Graboske said. "The last time rates were at this level, cash-out withdrawals as a share of available equity were more than 25% above where they were in Q4 2018, suggesting we could see a noticeable rebound in homeowners tapping available equity via cash-out refis in coming months given the increased rate incentive to do so."

Indeed, other recent data from Black Knight highlights the extent to which the market may be shifting, as consumers have seemingly become less concerned with paying higher interest rates when going through the mortgage refinancing process. In the fourth quarter, more than half of all refinances saw owners simultaneously tap equity with a cash-out deal and take on a mortgage higher rate in doing so. As a consequence of this trend, owners refinancing simply to get a better deal on their existing mortgage have become a minority, which is abnormal for the housing market, historically speaking.

It's worth noting, however, that "historically speaking" doesn't often have much to do with today's market, as prices have been rising at well above an all-time average clip for years now, and mortgage rates remain significantly below long-time and pre-recession averages.

"Equity is at a high not seen since 2003."

What comes next?
Because so much equity has been built up over the years since the recession ended and the market began its recovery, many housing experts believe there's a potential for a big boom in owners tapping what they've accrued in the next year or two, according to Bloomberg News. Equity is, in fact, at a high not seen since 2003, and continues to move inward from high-priced coastal metro areas, with many cities previously untouched by home price surges now experiencing them as well. To that end, potentially hundreds of thousands more homeowners are likely to get the benefit of booming equity within the next few years.

What form the utilization of that equity takes obviously varies on a case-by-case basis, but some likely uses include a cash-out refinance to pay down higher-interest credit card debt, buy a new car, renovate or add on to their homes, or otherwise put that money to better use than just allowing it to keep building, the report said. If this trend takes place en masse nationwide, it could provide further economic stimulus later in the year.

However, experts also caution that homeowners who intend to tap their equity - with a cash-out refinance, home equity loan or HELOC - to improve their properties in some way (adding a swimming pool, renovating the kitchen, etc.) should be careful about how much they take out, according to David Mount a director with the Wise Investor Group at Baird in Reston, writing for The Washington Post. In the past, certain home renovations may have been tax-deductible but thanks to the most recent sweeping changes to the tax code, that's no longer the case. Interest on a HELOC or home equity loan is still tax deductible, and certain renovation projects may be as well.

With home price growth now starting to slow down, homeowners who invest potentially tens of thousands of dollars into their properties will have to be aware that any work intended to boost property values may not get the return on investment they seek if current trends continue, the report said. Consequently, it's vital for homeowners to do all the necessary research to determine which projects will provide the best possible ROI.

Consulting with tax, real estate and financial professionals on all these issues might be a good idea for those with little to experience dealing with home equity, refinancing and renovation. Getting as much information about any potential plans for tapping equity will give consumers the chance to make a decision that works out for them financially in the years ahead.




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