Home equity is on the rise in the US. While the economy remains sluggish and unemployment continues to be a major concern, the housing market has shown one measure of unequivocal improvement: real values are largely up across the country, and as a result, consumer balance sheets are showing trillions of dollars in new equity.
Rising home prices are hugely important: As real estate values increase, homeowners have additional equity. They can refinance homes to get lower rates, trade in ARMs for fixed-rate financing or take out a home equity line of credit -- a HELOC.
The catch, though, is that there's both good news and bad. While equity in the US is increasing, home values are not going up everywhere. Moreover, millions of homes remain underwater, victims of the foreclosure meltdown.
Mortgages and Rising Home Equity
Figures from the Federal Reserve indicate much about home ownership and the American economy.
In 1999, residential property was worth $10.6 trillion, but with the introduction of "nontraditional" mortgage products between 2000 and 2006, more buyers entered the market and real estate values soared. With option ARMs, interest-only financing and mortgage applications that required little if any documentation, more people could buy real estate. The result was more bidders, more demand and quickly rising prices: by 2006, American homes were worth $22.6 trillion, better than twice the 1999 prices.
According to the Federal Housing Finance Agency (FHFA), US home prices peaked in April 2007. Meanwhile -- on the other side of the balance sheet -- between 1999 and 2006, real estate debt also more than doubled and many borrowers were soon caught in a classic squeeze: it became apparent that a lot of homes could not be sold for enough to repay their mortgages, while at the same time loans which had alluring features up front suddenly became far more expensive. Fitch Ratings estimated that the typical option ARM borrower saw payments increase by more than $1,000 per month once their initial low rates ended. The result was a torrent of foreclosures.
Home Equity Today
What we find today can be broken out in three ways:
First, home values have risen substantially since 2011, and one result is much additional equity. With more equity, owners have more options to sell and refinance.
Second, mortgage debt nationwide has actually fallen since 2011.
Third, the results are not consistent across all markets. For instance, the National Association of Realtors reports that home values rose in 125 metro areas during the first quarter. At the same time, values declined in 45 metro areas.
RealtyTrac says 9.1 million homes remain "seriously underwater," an expression which means the debt securing the property is at least 25 percent greater than the value of the home itself.
What About Your Home?
It's easy enough to spot general trends in your neighborhood; just look at nearby listing prices for homes and ask local brokers if homes are selling faster or slower. Web sites like Realtor.com also let you see the list and sale prices of nearby properties as well as their histories. You can also see street views and find them on a map.
If you have rising equity, you may want to consider refinancing at today's rates if a new loan can result in lower costs. You may also want to consider swapping an ARM for a fixed-rate loan. Another option made possible by rising prices is a HELOC -- a home equity line of credit, a very convenient source of cash to underwrite college costs or a new business.
For more information speak with mortgage loan officers and ask about the new opportunities now being created by rising real estate values.