Over the last six years, we have experienced strong price appreciation which has increased home equity levels dramatically. As the number of “cash-out” refinances begins to approach numbers last seen during the crash, some are afraid that we may be repeating last decade’s mistake.
However, a closer look at the numbers shows that homeowners are being much more responsible with their home equity this time around.
What happened then…
When real estate values began to surge last decade, people started using their homes as personal ATMs. Homeowners would refinance their houses and convert their equity into instant cash (known as “cash-out” refinances). Because homes were appreciating so rapidly, many homeowners tapped into their equity multiple times.
This left homeowners with little-or-no equity left in their homes, so when prices started to fall many homeowners found their houses in a negative equity situation (where the mortgage amount was greater than the value of the home). When some of these homeowners saw that there was no value left in their houses, they just stopped paying their mortgages altogether.
Banks eventually foreclosed on those homes and the foreclosures drove prices down even further and put more homes in the negative equity category. This cycle continued, leading to the worst housing crash in almost one hundred years.
What’s happening now…
Again, Americans are seeing their home equity grow. Today, over 48% of all single-family homes in the country have over 50% equity, and yes, some families are tapping into that equity. However, this time around, homeowners are not making irresponsible decisions. According to the latest information from Freddie Mac, the total equity being “cashed out” is a fraction of what it was leading up to the crash. Here are the numbers:
The recklessness that accompanied the build-up in equity prior to the last crash does not exist today. That makes this housing market much more secure than the one we had heading into 2008.
There is a lot of uncertainty regarding the real estate market heading into 2019. That uncertainty has raised concerns that we may be headed toward another housing crash like the one we experienced a decade ago.
Here are four reasons why today’s market is much different:
1. There are fewer foreclosures now than there were in 2006
A major challenge in 2006 was the number of foreclosures. There will always be foreclosures, but they spiked by over 100% prior to the crash. Foreclosures sold at a discount and, in many cases, lowered the values of adjacent homes. We are ending 2018 with foreclosures at historic pre-crashnumbers – much fewer foreclosures than we ended 2006 with.
2. Most homeowners have tremendous equity in their homes
Ten years ago, many homeowners irrationally converted much, if not all, of their equity into cash with a cash-out refinance. When foreclosures rose and prices fell, they found themselves in a negative equity situation where their homes were worth less than their mortgage amounts. Many just walked away from their houses which led to even more foreclosures entering the market. Today is different. Over forty-eight percent of homeowners have at least 50% equity in their homesand they are not extracting their equity at the same rates they did in 2006.
3. Lending standards are much tougher
One of the causes of the crash ten years ago was that lending standards were almost non-existent. NINJA loans (no income, no job, and no assets) no longer exist. ARMs (adjustable rate mortgages) still exist but only as a fraction of the number from a decade ago. Though mortgage standards have loosened somewhat during the last few years, we are nowhere near the standards that helped create the housing crisis ten years ago.
4. Affordability is better now than in 2006
Though it is difficult to afford a home for many Americans, data shows that it is more affordable to purchase a home now than it was from 1985 to 2000. And, it requires much less of a percentage of your income today than it did in 2006.
The housing industry is facing some rough waters heading into 2019. However, the graphs above show that the market is much healthier than it was prior to the crash ten years ago.
Rising home prices have been in the news a lot lately and much of the focus has been on whether home prices are accelerating too quickly, as well as how sustainable the growth in prices really is. One of the often-overlooked benefits of rising prices, however, is the impact that they have on a homeowner’s equity position.
Home equity is defined as the difference between the home’s fair market value and the outstanding balance of all liens (loans) on the property. While homeowners pay down their mortgages, the amount of equity they have in their homes climbs each time the value of their homes go up!
According to the latest Equity Report from ATTOM Data Solutions, “13.9 million U.S. properties in Q2 2018 were equity rich — where the combined estimated balance of loans secured by the property was 50 percent or less of the property’s estimated market value — representing 24.9% of all U.S. properties with a mortgage.”
This means that nearly a quarter of Americans who have a mortgage would be able to sell their homes and have a significant down payment toward their next home. Many who sell could also use their new-found equity to pay off high-interest credit cards or help children with tuition costs.
The map below shows the percentage of properties with a mortgage in each state that were equity rich in Q2 2018.
If you are a homeowner looking to take advantage of your home equity by moving up to your dream home, let’s get together to discuss your options!
Home values have risen dramatically over the last twelve months. In CoreLogic’s most recent Home Price Index Report, they revealed that national home prices have increased by 6.2% year-over-year.
CoreLogicbroke down appreciation even further into four price ranges, giving us a more detailed view than if we had simply looked at the year-over-year increases in national median home price.
The chart below shows the four price ranges from the report, as well as each one’s year-over-year growth from July 2017 to July 2018 (the latest data available).
It is important to pay attention to how prices are changing in your local market. The location of your home is not the only factor which determines how much your home has appreciated over the course of the last year.
Lower-priced homes have appreciated at greater rates than homes at the upper ends of the spectrum due to demand from first-time home buyers and baby boomers looking to downsize.
If you are planning to list your home for sale in today’s market, let’s get together to go over exactly what’s going on in your area and your price range.
We are beginning to see reports that more housing inventory is coming to the market and that buyer demand may not be increasing at the same pace it did earlier this year. The result will be many headlines written to address the impact that these two situations will have on home values.
Many of these headline writers will confuse “softening home prices” with “falling home prices,” but there is a major difference between the two.
The data will begin to show that home values are not appreciating at the same levels as they had over the last several years (softening prices). This does NOT mean that prices are depreciating (falling prices).
Here is an example: Over the last several years, national home values increased by more than 6% annually. If you had a home worth $300,000 at the beginning of the year, it would be worth $318,000 by year’s end. If the appreciation rate “falls” to 4%, that $300,000 house would be worth $312,000 at the end of next year – a $6,000 difference.
The price of the home did not fall. It just didn’t increase at the level it had the previous year.
Appreciation rates are projected to end this year at approximately 5%, and then drop to somewhere between 4-5% next year. This drop in appreciation rate will cause home price increases to soften.
Again, this does not mean that home prices will depreciate, but instead that they will appreciate more slowly.
Be careful when reading headlines that discuss home values. Some headline writers will be legitimately confused and will use the word falling in place of softening. Others will realize that the headline “Home Prices are Falling!” will get more clicks than “Home Prices are Softening” and will intentionally write the more compelling headline. Read the article. If the word depreciation is not mentioned, home values are not falling.