Home Equity and the Half-Full/Empty Glass
One of the most abused clichés in the English language involves the concept of a drinking glass filled to the halfway mark: The too-obvious question is whether the glass is half-full or half-empty. However, this well-worn concept is getting another pour following new data analysis of home equity by Irvine, Calif.-based CoreLogic.
According to CoreLogic’s latest report, nearly 950,000 homes returned to positive equity in the second quarter of 2014, bringing the total number of mortgaged residential properties with equity in the U.S. to more than 44 million. Nationwide, borrower equity increased year-over-year by approximately $1 trillion in the second quarter. Of the 44 million residential properties with positive equity, approximately nine million, or 19 percent, have less than 20-percent equity (referred to as “underequitied”) and 1.3 million of those have less than five percent (referred to as near-negative equity).
Texas had the highest percentage of mortgaged residential properties in an equity position at 97.3 percent, followed Alaska (96.5 percent), Montana (96.4 percent), North Dakota (96.0 percent) and Hawaii (96.0 percent).
The CoreLogic analysis also determined that roughly 5.3 million homes, or 10.7 percent of all residential properties with a mortgage, were still in negative equity in the second quarter. This number is down from 6.3 million homes, or 12.7 percent, in the first quarter. For the homes in negative equity status, the national aggregate value of negative equity was $345.1 billion at the end of the second quarter, down $38.1 billion from approximately $383.2 billion in the first quarter.
Nevada had the highest percentage of mortgaged properties in negative equity at 26.3 percent, followed by Florida (24.3 percent), Arizona (19 percent), Illinois (15.4 percent) and Rhode Island (14.8). These top five states combined account for 32.8 percent of negative equity in the United States.
To trot out the old kitchenware cliché, CoreLogic Deputy Chief Economist Sam Khater saw this glass as being half-full.
“The increase in borrower equity of $1 trillion from a year earlier is evidence that things are moving solidly in the right direction,” said Khater. “Borrower equity is important because home equity constitutes borrowers’ largest investment segment and, as a result, is driving forward the rise in wealth for the typical homeowner.”
Richard Zahm, president of San Francisco-based Primarq, stated that the new wave of positive equity will have benefits for both housing and the wider economy.
“Reaching positive equity is great in two ways. First is psychological–a huge weight is lifted from the homeowner, which brings more confidence in their own position and their own future," said Zahm. "Spending returns–take a look the shopping mall parking lots. And equity lifts the economy.”
Yet Zahm warned that the return of positive equity needs to be mirrored with a return of responsible behavior.
“Aside from the feel-good benefits, increased value has to be monetized and then either invested or used for consumption,” Zahm continued. “Paper wealth has to be converted–when prices rose in the early 2000s, homeowners tapped into their equity using HELOCs and other debt vehicles. This stimulated the economy, and we're still suffering from this. These vehicles are coming back, which could create a new over-leveraged situation: We're early in the cycle. There's also the problem of many of the underequitized continuing to be underqualified to refinance their homes given current lender sentiment and QM conditions. These issues are behind the equity sharing approach to home finance. For both affordability and sustainable home ownership, there is a better way to enable ownership and the opportunity to create wealth.”
Still, there are some that believe the proverbial glass is nowhere near half-full.
“For the five million people with negative equity, there’s nothing in the glass,” observed Grant Stern, president of Morningside Mortgage Corporation in Bay Harbor Islands, Fla. “But at least they are still able to retain the use of their homes.”
“It is positive that some people will be able to refinance and start the process to sell their homes,” said Logan Mohtashami, an Irvine, Calif.-based senior loan manager at AMC Lending Group and a financial blogger at LoganMohtashami.com. “The problem with the numbers is that even if you have a little bit of equity, you may not be able to sell and buy a new home. You would need to have between 28 percent and 33 percent in equity when you sell in order to have 20 percent for a down payment to buy. While these new numbers are helpful, we still have such a far way to go.”
Bob Simone, broker and owner of Foxborough, Mass.-based Better Living Real Estate, noted that another clichéd expression–the luck of the draw–comes into play when one considers which markets have enjoyed a faster return to positive equity.
“The two coasts are doing pretty well,” Simone observed. “There are signs that each coast has recovered from the housing recession. So the glass isn’t really half full or empty–it depends where your house, or your glass, is located.”
Don Ganguly, CEO of Irvine, Calif.-based HomeUnion, agreed, noting that healthier home equity markets are also in the midst of areas with a strong employment base.
“The major speculative markets, like Las Vegas, have been the longest to comeback,” Ganguly said. “But wherever fundamental employment opportunities existed, it has been bouncing back faster. Texas has the highest percentage of positive equity because of its broad-based employment.”
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