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The Power of Rising Equity

Tuesday, November 27, 2012   /   by Nathan Clark

The Power of Rising Equity

One of the things that hasn’t gotten a ton of attention in the media despite rising home prices in the United States is the growth in home equity.


 


The National Association of Realtors points out that existing homes sales rose for the eighth straight month in October, the most recent set of data. The U.S. median home sale price was $178,400, which is about 15 percent higher than it was at the start of this year.


 


In some regards, that rapid a rise in home prices might be concerning. People might begin to wonder if there will be another real estate “bubble,” and might also wonder if there will be an actual housing shortage. I think the answer to both of these concerns is “yes,” but with a couple of caveats.


 


One, I don’t believe the mortgage market, which ran virtually unchecked through the early part of the decade, could ever go that wild again. The financial market fueled the real estate bubble in a way it could probably not do so these days. So the inflation of any “bubble” would probably be less drastic than what we saw in the middle of the last decade.


 


As for a shortage of homes, that’s a reality, too. The supply of new homes being built over the past few years is not going to be enough to meet the demand that, in some areas, is already causing limited inventories. But it’s not necessarily bad when compared to the reality of 2007, when a lot of the country was overbuilt. Remember the 2-for-1 condo deals? That’s not healthy for any economy.


 


The rise in prices and potential supply issues that will keep them moving up are actually a good thing for the overall economic recovery. Yes, affordable homes for families are important – I believe in that wholeheartedly – but if there’s anything we learned about U.S. citizens and their houses over the past few years, it’s that equity is a big deal.


 


The NAR reported that the rise in the median home price has led to an estimated $760 billion in equity to American homeowners. Another way of saying that is that American homeowners are now $760 billion wealthier than they were a year ago. I think that’s probably more important than any kind of stimulus that’s been pumped into the economy to get it going.


 


Homeownership rose to what was an unsustainable near-80 percent before the bubble burst and then declined. But the fact is that more than two-thirds of American adults are homeowners. That means the rise in home equity has affected a large majority of the population. In fact, for most, the biggest asset that contributes to their wealth is their primary residence.


 


But the rise in home equity affects the overall economy in more than just the value of homes “on paper.” For starters, access to home equity loans or lines of credit increases when equity does. As a society, we’re all borrowing less than we were before the credit crisis hit six years ago, but greater home equity nevertheless means greater access to money that can be spent.


 


The NAR also estimates that for every two homes sold, one job is created. A lot of other industries are tied to the real estate industry, and houses have to sell to support job growth.


 


Increased equity also means greater mobility in terms of housing – both from a geographic and economic standpoint. One of the reasons the economic recovery was so slow to take hold was the inability for many homeowners to move to where there were better jobs. Being “under water” in a house – owing more than it’s worth – prevented plenty of people from selling, which prevented them from moving.


 


From an economic standpoint, it put pressure on the “move-up” markets. Growing families who typically buy bigger houses in family-friendly neighborhoods had less opportunity to do so because of the lack of equity in their current home. It’s tough to come up with the down payment on, say, a $300,000 house without tapping into the equity in the home you’d be selling.


 


All these things are a drag on the overall economy. If all the attempts by the federal government to “fix” housing taught us anything, it was that modifying mortgages to include principal reduction seemed to make the most difference. When people didn’t owe a ton more on a home than it was worth, they were a lot less likely to default on a loan.


 


It doesn’t seem like rocket science, does it? More equity means people feel more secure about their financial situation, have more access to funds and present much less risk to financial institutions. Win-win.


 


Hopefully, the rise in home equities will positively affect the mortgage industry so that people can borrow the money they need to purchase homes. Already, the NAR reports, the average down payment on a home this year has dipped to 9 percent, the lowest it’s been since 2006. I believe that’s a good sign, one that seems to say that rising home equity makes banks more comfortable, too.


 


For the economy to become strong again, this rise in home values will have to continue. Americans are more comfortable spending money when they’re secure in their homes. When they spend more money, they contribute to the overall economy and help create jobs.


 


So while the increased sales volume and shrinking inventory will continue to get the headlines, rising home equity is what will really help drive this economic turnaround.

Nathan Clark & Associates
Nathan Clark Team
39 Cedar Swamp Rd
Smithfield, RI 02917
401-232-7661

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