Equity in homes surges in past year, allowing owners to sell, borrow and refinance

By Kenneth R. Harney December 20, 8:45 AM

The biggest story in American real estate in 2013 hasn’t gotten the attention it deserves, so let’s shout this out: Homeowners’ net equity holdings soared by $2.2 trillion between the third quarter of 2012 and the third quarter of this year, according to new data collected by the Federal Reserve.

This is a record rebound for a 12-month period. And it’s crucially important in personal financial terms for hundreds of thousands of owners who have been underwater on their mortgages for years. They now have options they didn’t have before: They can sell their homes and not have to bring money to the closing. They may be able to borrow against their equity to help pay for college tuition, home improvements and other purposes. They may be able to refinance their mortgages without having to use a government-aided program.

Home equity is the difference between the mortgage debt outstanding on a residence and the current market value of the home. If your house is worth $300,000 and you owe the bank $150,000 — whether from a single mortgage or multiple loans — you have $150,000 in equity. If your mortgage debt totals $350,000 on a $300,000 house, you have $50,000 in negative equity. Equity generally grows in several ways: You lower your debt by making payments to your lender, the value of your house increases because market conditions improve or you raise the home’s sales value by remodeling or upgrading it.

Growing home equity not only signifies widespread recovery in household personal wealth, it also provides an important boost for the ongoing economic recovery. Consumers who have a cushion of equity in their homes are more likely to spend money on goods and services than those who don’t. The latest Fed “flow of funds” calculations show that owners have now seen their equity stakes grow by more than $3.2 trillion from the post-bust low point in the first quarter of 2011.

During the financial crisis of 2008-11, millions of Americans fell into negative equity positions as the sale value of their homes plummeted. With the recovery that took hold in 2012, values began to turn upward again, dramatically so in some areas where prices had fallen fastest.

A study released this week by CoreLogic, a real estate and mortgage data firm, estimated that 791,000 homes moved from negative to positive equity status during the third quarter of this year alone, and more than 3 million have done so since the beginning of 2013. Though 6.4 million homes continue to be underwater on their mortgage debt — 13 percent of all homes with a mortgage — that is down from 7.2 million (nearly 15 percent) as recently as the end of the second quarter of this year.

CoreLogic researchers found that among the states that experienced the most severe property devaluations during the bust and have recovered impressively, some continue to have persistent hangovers of negative equity. In Nevada, nearly a third of all homes are underwater, despite price gains. In Florida, nearly 29 percent are still in negative equity, and in Arizona it’s nearly 23 percent.

In California, which suffered deep equity losses in non-coastal areas between 2007 and 2010, home values have roared back in the past two years. Now the state has just a 13 percent negative equity rate — significantly lower than Ohio (18 percent), Michigan and Illinois (both 17.7 percent,) Rhode Island (16.6 percent) and Maryland (15.6 percent).

The states with the highest rates of homeowner equity: Texas and Alaska, where 96.1 percent of all owners with mortgages are in positive territory, Montana (95.8 percent), North Dakota (95.7 percent) and Wyoming (95.4 percent).

Other findings from the CoreLogic study:

●People with higher-priced homes are somewhat more likely to have positive equity than owners of lower-cost houses. While 92 percent of all mortgaged homes in the country valued at more than $200,000 have positive equity, 82 percent of homes valued at or below $200,000 do.

●Though homeowner equity wealth has increased rapidly in the past year, 10 million homeowners still have only modest equity stakes — less than 20 percent — and that puts them at risk should property values tumble again.

But another bust is nowhere in sight, thanks to tougher underwriting and regulatory oversight. So whether you’re one of the recent arrivals to positive equity status or you’ve enjoyed it all along, the new year looks encouraging.