Harney: Owners reap equity boost as prices rise

Feeling just a little bit richer lately despite the roller coaster swings in the stock market and your IRA and 401(k) balances? Maybe. Maybe not. But if you’re a homeowner, the odds are that your real estate equity has been growing steadily since 2012 and is higher today than it has been in years.

New household financial data released Sept. 18 by the Federal Reserve indicated that Americans’ real estate equity holdings rose by a stunning $1.3 trillion between the second quarter of last year and the same period this year. Home equity holdings have more than doubled since 2011, from just a little over $6 trillion to $12 trillion-plus today.

These are nearly incomprehensibly large numbers that can be difficult to relate to your own situation. They don’t mean that your own personal home equity has doubled during that four-year span — although it might have or even more, depending on where you live and how much debt you’ve been carrying. On the other hand, if your local market is among those that have continued to struggle economically, it’s possible your equity has remained flat or you have negative equity — you’re underwater. But for the vast majority of owners, the Fed’s news is good: Thanks to rising equity, your net wealth is up.

Real estate equity is the difference between the current market resale value of your home and your current mortgage debt, including first and other loans secured by the house. If you own a $300,000 home and you owe the bank $100,000, your equity is $200,000. If you own a $200,000 condo and the debt against it totals $250,000, you have negative equity of $50,000. If you bought a $300,000 house with a $15,000 down payment — your initial equity investment — and your home value has increased to $345,000, your equity has quadrupled, not including whatever reductions you’ve made to your mortgage principal debt.

Home equity grows when you pay down your mortgage debt; make capital improvements that enhance the value of the property; and when home sale prices in your area increase because demand by buyers outstrips the supply of houses listed for sale. Even though your home is not actively on the market, its value floats upward with the rising tide. Nationwide, according to the latest S&P/Case-Shiller 20-city composite home price index, home prices rose by about 4.5 percent between June of last year and this June. That’s more than double the rate of inflation overall.

Home equity is not only important for the economy as a whole, but also as a deeply personal concern for millions of owners who are still underwater. Real estate analytics company CoreLogic reported recently that between April and the end of June of this year, nearly 760,000 owners across the country moved back into positive equity territory, thanks primarily to rising prices. Roughly 46 million homeowners with mortgages have positive equity, according to CoreLogic, but 5.4 million others are underwater.

With another 5 percent gain in home prices between now and July of next year, CoreLogic estimates that an additional 800,000 homes now in negative equity should cross the line into positive equity positions.

That’s crucial not only for the families involved but for the health of the housing market overall. When you are underwater, it’s difficult to move: Selling the house means you’ve got to bring money to the closing rather than walk away with a net profit. Unable or unwilling to do that, many owners who have negative equity hunker down and hope for better days before they move or sell. That messes up the usual market flow, where existing owners move up and sell to newcomers.

So where is America’s positive equity concentrated in percentage terms? Along the coasts, where property values and incomes are highest? Nope. According to CoreLogic’s study, Texas has the highest percentage of homes with positive equity (97.9 percent), closely followed by Alaska and Colorado (both 97.6 percent), Hawaii (97.5 percent) and Montana (97.2 percent). Washington state (96.2 percent), New York and Washington D.C. (both 95.5 percent), Oklahoma (94.8 percent) and California (92.7 percent) are all above the state equity average of 91.3 percent.

At the other end of the spectrum, Nevada, Arizona, Florida, Illinois and Rhode Island have below-average equity levels, revealing how long it is taking for the deep wounds from the housing bust to heal.

Kenneth R. Harney of the Washington Post Writers Group is a past member of the Federal Reserve Board’s Consumer Advisory Council and is currently on the board of directors of the National Association of Real Estate Editors. Reach him at KenHarney@earthlink.net.