The Federal Reserve has come out with some frothy new home-equity estimates that represent good news for American homeowners. According to a report released last month, there was an estimated $1.2 trillion in U.S. equity growth in 2015 over the previous year. Moreover, the Fed put total equity holdings nationwide at $12.5 trillion — a stunning doubling between 2011 and the final quarter of 2015. Equity is the difference between a homeowner’s mortgage balance and the property’s market value. If a house or condo is worth $350,000 and there is $200,000 in mortgage debt against it, that’s a positive equity of $150,000. If the house is worth $350,000 and there is $400,000 worth of mortgages on it, the homeowner is underwater by $50,000.
Though the vast majority of the country’s houses with mortgages have positive equity, roughly 4.3 million homes are underwater, mainly as a legacy of the financial crisis and recession. Another 9.5 million are what analysts call “under-equitied,” with less than 20 percent equity, according to data from research firm CoreLogic. When homeowners have minimal or no equity, their financial options tend to become limited: They may find it impossible to sell their homes without having to bring lots of cash to the closing. They may also find it difficult to refinance out of an albatross mortgage that’s been around their necks for years. And they likely can’t tap into their home for help on worthy expenses — they can’t take out a second mortgage or home-equity line of credit to help with tuition payments or remodeling the kitchen.
But the most significant news emerging from the latest national data on equity is that things are looking up. Thanks to rising home prices and pay-downs of mortgage principal, large numbers of people previously in negative equity are crossing the line into positive territory. CoreLogic estimates that around one million of them did so during 2015. Another half million owners escaped from under-equitied status, moving them above 20 percent equity. If prices rise another 5 percent in the coming year, 850,000 more homes should see significantly broadened financial options, say researchers.
Homeowners should know where they are equity-wise. Equity is inherently challenging to track; nobody sends a monthly accounting. They can’t look it up somewhere. Recent research from mortgage lender loanDepot, LLC suggests that most individuals don’t have a good grasp on their home’s market worth, making equity estimates difficult at best. Researchers found that though 57 percent of owners believe their home value has increased since 2012, 80 percent of them underestimate how much it’s actually risen. That’s at odds with findings by Quicken Loans’ monthly analysis of owners’ estimates compared with appraisers’ reports. In the latest study, Quicken found that owners overestimate their home values by around 2 percent.
Either way many homeowners can only guess about the size of what may be their largest investment asset. LoanDepot Chief Financial Officer Bryan Sullivan says this is especially the case for people who purchased during the housing boom, watched home prices crater and since then haven’t kept up with local market changes. They have “regain[ed] equity many thought was lost forever” but also “are unclear about how to determine changes in their equity.” That, in turn, may be stopping them from making good use of their equity positions — whether to sell and move or to pull some of it out via a home-equity credit line or second mortgage.
So how should homeowners keep track? By starting with the part of the equation they probably know precisely because it’s sent to them monthly by their lenders: outstanding principal balance. To get an idea of market value they can type in an address at sites like Zillow and Redfin and others that offer automated estimates online. But they should also beware: Local area median error rates on these sites can mangle the calculations.
Those considering selling sometime in the foreseeable future should contact several local realty agents who specialize in their area, level with them about timing and ask for their best estimates. Or they can hire a local real estate appraiser. For those who seriously want a benchmark on equity, either of these two options would be the way to go.
Kenneth Harney is a syndicated columnist.