Rising home prices spur equity growth

Here’s some housing cheer for the end of the year: The stock market may have taken people’s 401(k) and other funds on scary rides in 2015, but new data from the Federal Reserve suggests that homeowners have probably seen steady, if not spectacular, growth in their home equity.

Between the third quarter of 2014 and the same period in 2015, Americans’ home equity holdings grew by nearly $1.3 trillion, according to the Fed, thanks mainly to rising home prices. Between 2011 and this year, homeowner equity nearly doubled and now totals just under $12.4 trillion. That’s impressive, but it’s still below the $13.3 trillion it hit during early 2006, when the housing boom was at its manic zenith.

An individual’s home equity is the difference between the market resale value of his house and the mortgage debt he has against it. If a house is worth $400,000 and there is a first mortgage balance of $220,000 and a $30,000 second mortgage or credit line balance outstanding, the equity is $150,000, exclusive of the costs that might be incurred in a sale. If a homeowner purchased his first house for $250,000 two years ago with a 5 percent ($12,500) down payment, and his local real estate market has seen average price growth of 5 percent per year since then, his house may now be worth more than $275,000 and his equity position may exceed $38,000, not counting any principal reduction. That’s nice.

Then there’s the flip side: A homeowner might have negative equity — he’s underwater, upside down — with mortgage balances that exceed his property value. Not all housing markets are seeing steady growth in prices and not all homeowners have recovered from their equity nightmares of the housing bust. But tens of thousands of owners are moving out of negative equity every month as home prices rise, according to researchers.

During the three-month period from July through September, 256,000 homes with mortgages crossed over the line from negative to positive equity, according to a new study by analytics firm CoreLogic. Roughly 92 percent of all American homes with mortgages — 46.3 million — had positive equity, and 37.5 million of them had equity stakes of at least 20 percent. Compared with the year earlier, there were 21 percent fewer homes with negative equity.

Why’s that important news? Because negative equity gums up the housing system and the economy as a whole. Owners with negative equity can’t sell without bringing money to the closing, so they don’t sell. They don’t buy new houses so builders don’t build them and don’t hire as many construction workers as they otherwise would. Underwater owners may not seek or accept employment opportunities that require them to move. And they don’t have the range of financial planning options that they’d enjoy if they had an equity cushion in their home.

What sort of options? Take refinancing. It can be challenging when a homeowner is upside down and he’d like to get a better mortgage before interest rates rise. Or how about one of the least-publicized but fastest-growing forms of refinancing — doing a “cash out.” A cash-out refi means you get a replacement mortgage that is larger than the one you are paying off and you keep the extra money as cash, tax free. According to Len Kiefer, deputy chief economist for mortgage investor Freddie Mac, about 40 percent of all new refinancings during the third quarter of 2015 involved increases in balances by at least 5 percent. That’s up from 27 percent early this year and is the highest rate of cash-outs since 2009.

So what are owners doing with their cash? Kiefer doesn’t collect data to track that, but he suspects many are using the extra money to consolidate household debts, including paying off outstanding home equity lines of credit (HELOCs) dating back to the boom-and-bust years. Some of those HELOCs are now morphing from interest-only payment mode into more costly full amortization — principal plus interest — and becoming a drag on household budgets.

Cash-out refis aren’t an option if a homeowner doesn’t have the home equity base to support a larger mortgage. Nor are HELOCs, which are also booming again and being used for everything from college tuitions to home remodelings.

Bottom line: It was a good year for growing home equity wealth for millions of Americans. Let’s hope 2016 is as fruitful.

Kenneth Harney is a syndicated columnist.