As equity in housing rises, millions of owners escape the perils of the real estate bust

March 13

The economy may be growing at a frustratingly slow pace, but one piece of it is booming: American homeowners’ equity holdings — the market value of their houses minus their mortgage debts — soared by nearly $2.1 trillion last year to $10 trillion.

Big numbers, you say, and hard to grasp. But look at it this way: Thanks to rising prices and equity levels, about 4 million owners around the country last year were able to climb out of the financial tar pit of the housing bust: negative equity.

Negative equity gums up people’s lives and the real estate marketplace as a whole. It makes it difficult or impossible for many owners to refinance out of a higher-cost mortgage into a more affordable one. It makes it painful to sell: You’ve got to bring cash to the table to pay off what you still owe to the bank. In addition, almost no one wants to lend you money, at least not at reasonable interest rates secured by your real estate, when you’re deeply underwater. So you’re likely to spend less and invest less, and you’re probably not going to buy another house. Nor will potential buyers be able to purchase yours.

So when 4 million owners manage to transition out of negative equity into positive territory, that’s significant news not just for them personally but for the economy overall.

Two statistical studies released last week offered a glimpse of where the country is in terms of homeowner equity seven years after real estate began to tumble and crash.

The first was the Federal Reserve’s quarterly “flow of funds” report. Among many other segments of the economy it toted up, the Fed found that homeowner equity has rebounded to its highest level in eight years, though it’s still not quite back to the $12 trillion it was during the hyperinflationary high point of the housing boom in 2005.

The second study, from the real estate analytics firm CoreLogic, focused on the flip side: the impressive shrinkage of negative equity. According to researchers, nearly 43 million owners with mortgage debt have positive equity. Roughly 6.5 million owners are still in negative-equity positions, but that’s down from more than 10 million a year ago and 12 million in 2009.

Who are they and where are they? Not surprisingly, they are heavily concentrated in areas that saw the wildest price run-ups, the heaviest use of toxic loan products and the steepest plunges during the crash. In Nevada, 30.4 percent of all owners with mortgages are underwater. In Florida, it’s 28.1 percent. Arizona, 21.5 percent. Still, all three areas have improved sharply over the past two years.

Although non-coastal California markets suffered some of the most dramatic declines in property values during the bust, researchers found that the state as a whole is nowhere near the top of the latest negative-equity list. With 12.6 percent of mortgaged homes underwater, California has a lower overall negative rate than the national average (13.3 percent), and it has proportionally fewer underwater homes than Maryland (ranked 10th worst in the country, with a negative equity rate of 16.2 percent), Ohio (19 percent), Illinois (18.7 percent), Rhode Island (18.3 percent) and Michigan (18 percent.)

Among the best markets for positive equity: Texas, where just 3.9 percent of owners are in negative positions, Alaska (4.2 percent), New York (6.3 percent), Oklahoma (6.4 percent) and the District (6.5 percent). Higher-priced houses generally have lower rates of negative equity compared with houses in lower-priced areas, many of which saw construction booms for entry-level, low- and moderate-cost homes in the suburbs of major cities during the boom years. Just 8 percent of mortgaged houses worth more than $200,000 have negative equity, compared with 19 percent of less-expensive houses.

Having positive equity is one thing but do you have adequate equity? Or are you, as CoreLogic refers to the phenomenon, “under-equitied”? Researchers define “under-equity” as mortgage debt that is in excess of 80 percent of your home’s resale value. This is important in practical terms, they say, because having less than 20 percent equity makes it more difficult for you to pursue potentially helpful financial options, such as refinancing your primary home loan or obtaining an equity credit line. About 21 percent of all mortgaged houses nationwide are in this situation, and 1.6 million owners have less than 5 percent equity.

Ken Harney’s e-mail address is kenharney@earthlink.net.

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