‘Equity’ a Hot Word

Forget housing starts; forget existing home sales (see story above); forget new home sales. The hot word in housing right now is “equity”–and it’s something a growing number of Americans have as an option.

Reports from CoreLogic, Irvine, Calif.; Bankrate, New York; and Black Knight, Jacksonvile, Fla., suggest Americans have more home equity than ever and are looking for increasingly creative ways to use it.

CoreLogic said in its second quarter Home Equity Report the share of properties in negative equity fell to 4.3 percent, while nearly 221,000 residential properties regained equity compared with to first quarter.

The report said U.S. homeowners with mortgages (which account for nearly 63 percent of all properties) have seen their equity increase by 12.3 percent from a year ago, representing a gain of nearly $981 billion. Additionally, the average homeowner gained $16,200 in home equity over the past four quarters.

CoreLogic said while home equity grew in almost every state in the nation, western states experienced the most significant increases. California homeowners gained an average of $48,800 in home equity, while Washington homeowners experienced an average increase of approximately $41,100.

However, despite a 9 percent drop in total mortgage homes with negative equity, the report said 2.2 million homes, or 4.3 percent of all mortgaged properties, continue to have negative equity. Year over year, the number of mortgaged properties in negative equity fell 20.1 percent from 2.8 million homes, or 5.4 percent of all mortgaged properties, in the second quarter.

“When aggregated across all homeowners that totals almost $1 trillion in gains in home equity wealth,” said Frank Nothaft, chief economist for CoreLogic. “This wealth gain will support additional consumption spending and home improvement expenditures in coming years.”

Earlier this month, Black Knight said despite slower home price growth, U.S. tappable equity surpassed $6 trillion for the first time, affecting 44 million homeowners with mortgages.

The company’s monthly Mortgage Monitor report said tappable equity grew by $256 billion in the first quarter, bringing total growth for the year to $636 billion. Black Knight reported three times as much tappable equity available than at the bottom of the market in 2012.

Black Knight reported the top 10 housing markets accounted for more than 60 percent of tappable equity growth in first quarter, but due to slowing home price gains, that share fell to just 33 percent in the second quarter. Results for California stand out: whereas home price gains nationally were higher in the second quarter than the first, in California, the average home price gain slowed by 43 percent. In the most expensive areas of the state, average price gains saw an 80 percent quarterly decline.

According to Bankrate.com, most homeowners know what they want to do with that newfound equity–and it’s not necessarily for home improvement. The company reported 24 million homeowners believe that it’s acceptable to tap into home equity to keep up with regular household bills, according to a new Bankrate.com report. The sentiment is highest amongst Millennials (ages 18-37), the lowest earners and the less educated.

Bankrate said nearly one in three (31%) homeowners who earn less than $30,000 per year say it’s okay to tap into home equity to cover ordinary bills, more than triple those who make $75,000 or more. Twenty-one percent of those with no more than a high school diploma agree, nearly doubling those who have furthered their education (11%).

Twenty-two percent of Millennials think that borrowing from home equity to pay day-to-day bills is viable, compared to 12% of those who are older.

“The idea that nearly one in six American homeowners views ‘keeping up with regular household bills’ as an appropriate reason to borrow from home equity speaks to how far some households are stretched on a monthly basis,” said Bankrate.com chief financial analyst Greg McBride.

Bankrate said the majority of homeowners (57%) believe the best reason to borrow against home equity is to make home improvements or repairs. Baby Boomers (ages 54-72) have the highest occurrence of saying such. Debt consolidation (19%) and education expenses (9%) are the next most popular choices as the best reason to borrow, with education expenses skewing towards Millennials.

Overall, Bankrate found 74% of homeowners think home improvements/repairs are an adequate circumstance to borrow from home equity. Other reasons include debt consolidation (44%), tuition or other education expenses (31%), keeping up with regular household bills (15%), making other investments (12%), purchasing big ticket items like furniture or appliances (9%), taking a vacation (3%), buying a boat (1%) and getting plastic surgery (<1%). Respondents could choose more than one reason.

“With the sorry state of emergency savings and increasing levels of consumer debt in a rising interest rate environment, it is a matter of when, not if, more homeowners turn to home equity to fund home improvements and repairs or consolidate debt,” McBride said. “Many Americans may have more tappable equity than they realize, and as home values increase and mortgage principal is paid down, that equity is on the rise.”