With the end of 2013 closing in, it is time to take stock of the impact from the strong 2013 housing market. Home price growth was robust in 2013 compared to 2012 and is currently forecast by NAR Research to finish the year 11.3% stronger. This improvement is important for the market as it has created equity for homeowners, boosted buyer confidence, and pulled many underwater homeowners into positive equity positions.
A borrower who purchased a median priced home in 2004 and held it for nine years, the current median tenure of a homeowner according to NAR’s annual Profile of HomeBuyers and Sellers, would have $28,114 in equity from the combined benefit of price appreciation and paying down the mortgage principle. A borrower who bought a median price home in 2012 would have more than $23,000 in equity.
It is important to note that borrowers who purchased in 2006 and 2007 at the peak of the market and thus those who experienced the sharpest price declines are now nearly in positive equity. A person who purchased in 2006 and owned through 2012 (not pictured) would have been underwater by roughly $28,200, but by 2013 this gap was down to $4,700. Continued price growth in 2014 will help to further ameliorate this gap. Homeowners who purchased since 2007 are in positive equity.
Even through the visitudes of the great recession, for most homeowners housing remains an effective vehicle for building equity and wealth.
 With a 10% downpayment at the prevailing average 30-year fixed mortgage rate
- Housing equity rose 30% or more than $2 trillion over the past year as prices rose, home purchases rebounded, and mortgages outstanding continued to decline according to second quarter data from the Federal Reserve’s Flow of Funds.
- Mortgage debt outstanding fell by slightly less than $200 billion while the market value of household real estate surged 12 percent, topping $18.6 trillion.
- The rise in the value of household real estate is welcome relief to owners, but as prices rise and affordability starts to wane, some wonder whether we are seeing a return of a housing bubble. Here are some reasons that is unlikely the current case.
- In spite of the rise in house prices, the total value of household real estate remains roughly 18 percent below the peak in 2006. Additionally, mortgage debt has been on the decline.
- The housing market has rebounded in spite of falling mortgage debt in large part because of all-cash or high cash purchases. Scholastica Cororaton discusses the latest results from the Realtors® Confidence Index here, which show that 29 percent of recent transactions in July were all-cash purchases. This trend has been quite consistent over the last few years in spite of low mortgage rates.
- Housing equity rose nearly 30%, or nearly $2 trillion, over the past year as prices rose, home purchases rebounded, and mortgages outstanding continued to decline according to first quarter data from the Federal Reserve’s Flow of Funds.
- Mortgage debt outstanding fell by $200 billion while the market value of household real estate surged 11 percent, topping $18 trillion.
- The rise in the value of household real estate was anticipated as a result of increasing home prices as discussed here. In spite of the rise in house prices, the total value of household real estate remains roughly 20 percent below the peak.
- The housing market has rebounded in spite of falling mortgage debt in large part because of all-cash or high cash purchases. Jed Smith discusses the latest results from the Realtors® Confidence Index here, which show that 32 percent of recent transactions in April were all-cash purchases. This trend has been quite consistent over the last few years in spite of low mortgage rates.
- In total, home owners now have equity equal to 49 percent of the total value of household real estate compared to as little as 37 percent in the first quarter of 2009.
The economy is barely crawling along. A recent sizable downward revision to GDP figures showed that the current economic activity – adding up all income generation from producing autos to providing hair cuts – is still below the recent past cyclical peak achieved in late 2007 even though the country added over 10 million additional people in the workable age of 16-and-over. Progress in America has stopped.
Without economic growth the large budget deficit and debt problems will continue to worsen. History has revealed that one of the biggest sources of federal government revenue has come from more people working and more people paying taxes. The current unemployment rate of 9 percent is just too high.
One major reason for economic struggles is that small businesses – the entrepreneurial heart of America – cannot find funds. Because of the small nature of the business, these entrepreneurs cannot issue bonds like IBM or Disney. Banks also have been extra tough on any borrowers without an established name. Small businesses, therefore, typically have relied on their savings and their housing equity to gather funds to test out new business ideas.
But housing equity – housing asset value minus mortgage liability – has greatly shrunk in the painful aftermath of the housing market crash. The aggregate homeowners’ real estate equity stood at $6.1 trillion today versus $13 trillion in 2006 according to Flow of Funds data from the Federal Reserve. According to Census, there are 74 million homeowners. So on average, the average equity per homeowner in 2011 is $82,000, which is down from $170,000 in 2006. A separate Federal Reserve data from Survey of Consumer Finances showed that the median homeowner net worth to be $190,000. This larger net worth figure is due to homeowners having other assets in addition to housing equity. The median renter’s net worth was $4,000. The only good news at the moment is that the further declines appear largely over. Price measurements from NAR, Case-Shiller, Core Logic, and Federal Housing Finance Agency have all noted a slight uptick in home price in recent months.
In order to truly kick start the U.S. economy on a sustainable robust growth path, small businesses need to tap funds and home price recovery will be critical to that process in the upcoming years. Any obstacle to home price recovery will, therefore, hamper economic growth and job creation. For example, policymakers need to be well aware that a trimming of mortgage interest deduction will hurt home values and consequently hurt small business start ups.