Behind the home equity boom

For most homeowners, their property is their biggest asset. It can’t be tracked online or checked in monthly statements sent by a bank, but it’s crucially important for their personal financial well-being and retirement planning.

It’s home equity — the difference between the market value of a house and whatever debt the owner has on it. Equity for most of us is a big deal and, based on data released last month by the Federal Reserve, Americans’ home-equity holdings are booming.

That’s great news for most owners, though not all, and for the economy as a whole. The more equity we have, the more likely we are to spend money on goods and services that create more jobs, a process known as the “wealth effect.”

Now consider these brain-bending big numbers: Thanks to rising prices and substantial continuing pay-downs of mortgage debt, owners’ combined equity holdings increased by $795 billion during the three months between the end of December and March 31. Homeowners’ equity holdings at the end of the first quarter totaled $10.8 trillion, the highest amount since late 2007, but still well below the bubble-era record of $13.4 trillion reached in early 2006.

The ongoing boom is also pulling thousands of owners across the country out of real estate purgatory. They’ve been stuck in negative equity positions, but are now transitioning to positive. According to new estimates from mortgage and housing analytics firm CoreLogic, the owners of 312,000 houses moved out of negative territory during the first three months of 2014. If prices rise by just 5 percent in the year ahead, say researchers, another 1.2 million owners could do the same.

Now for the sobering side of the home-equity story: Despite the boom in housing wealth underway, many owners are still not able to join the party. About 6.3 million of them remain underwater on their loans. The average amount of negative equity they’re carrying is often significant — they owe an average of 33 percent more than their house could command in a sale today. That gives you an idea of the widespread pain still being felt in the wake of the bust and recession.

The impact is especially severe for owners who bought with little or nothing down and then loaded on additional debt with second mortgages. The average negative equity balance for owners with two mortgages is about $75,000, according to CoreLogic. For households with one mortgage, the average negative equity is around $52,000.

Also on the sobering side, millions of owners continue to have less equity than they’ll need if they want to sell or even refinance. At the end of March, 10 million owners had less than 20 percent equity in their properties and 1.6 million had less than 5 percent. Given real estate transaction costs, most people with less than 5 percent equity would have to bring money to the table to pay off the debt on their house when they sell.

Equity holdings are closely linked to market segments — higher-cost houses are less likely to be in negative equity positions than lower-cost homes — and geography. According to CoreLogic, only about 3 percent of homes costing more than $500,000 have negative equity. By contrast, 17 percent of homes costing less than $200,000 are in negative positions.

Not surprisingly, areas of the country that performed worst during the bust—locations where easy-money financing was most common during the boom—continue to have high rates of negative equity, even well into the housing rebound.

But there’s one dazzling exception: California. In some inland counties during the recession, toxic financing contributed to home value losses of 50 percent and higher. Yet today, thanks to the most vigorous marketplace rebound of any state, just above 11 percent of California homes are in negative equity. That compares with 29 percent in Nevada, 27 percent in Florida, and 20 percent in Arizona.

Where are average equity levels highest? Texas, where home prices remained modest and affordable during the boom, is at the top. Just 3.3 percent of Texas homes have debt exceeding their resale values. Rounding out the top five, Montana, Alaska, North Dakota and Hawaii all have less than 5 percent negative equity on average. The District of Columbia, a high-cost market that has seen significant home-price appreciation in the past several years, ranks sixth best in the country with a 5.1 percent negative equity rate.

Kenneth Harney is a syndicated columnist.