How owners, sellers and buyers stand to benefit
By Erik J. Martin
CTW Features
One of the key advantages to owning a home is the ability to earn equity, which is the difference between your property’s fair market value and the amount of debt you owe on it. Typically, your equity goes up as you continue to pay down your mortgage balance and when your home’s value appreciates.
Judging by the latest data, 2016 has been a good year for increased equity. And that can mean good things for owners, sellers and buyers.
Consider that, over the last five years, home equity wealth has doubled to $13 trillion, resulting in an average gain of $11,000 in housing wealth for every homeowner nationwide over the past year, according to a new report by CoreLogic; the report further indicated that home prices across the country increased 6.3 percent between September 2015 and September 2016, and it forecasted that home prices should rise by 5.2 percent between now and September 2017.
Want additional proof that home equity is on the upswing? A separate recent study by ATTOM Data Solutions reveals that over 13 million American homeowners (more than 23 percent of all U.S. homeowners with a mortgage) are equity rich – defined as having a mortgage loan-to-value ratio of 50 percent or lower; that’s up by more than 2.6 million homeowners from 2015.
“We are in a mature housing boom where more than one in five homeowners has quickly growing home equity wealth,” says Daren Blomquist, senior vice president of ATTOM Data Solutions in Irvine, Calif. “One of the reasons behind the rapid growth in home equity wealth, in addition to steadily rising home prices over the past four-and-a-half years, is that homeowners are staying in their homes longer before selling – 7.94 years on average, which is the longest home ownership tenure we’ve seen since we’ve been tracking this starting in 2000.”
The rise in home equity should have a positive trickle-down effect on the housing market and overall economy in 2017.
“Homeowners are the obvious winners here. They can leverage their newfound home-equity wealth to renovate their current home, move up into a new home or more expensive home, or take out a home equity loan for some other purpose,” Blomquist says.
Colby Sambrotto, president and CEO of USRealty.com, agrees, adding that homeowners can also improve equity positions in another way.
“Home equity translates to more small businesses starting,” says Sambrotto. “Business startups dropped a step behind as the recession played out. Now, as home values have stabilized and are finally rising, business startups are rising. This is because small business loans guaranteed by the Small Business Administration typically require collateral, and a very common form of collateral is home equity.”
Sellers are also poised to take advantage of increased equity benefits.
“The combination of the rapid rise in home-equity wealth over the past year and rising interest rates will likely motivate more equity-rich homeowners – including move-up buyers and downsizing baby boomers – to get off the fence and sell in 2017 before interest rates go higher,” notes Blomquist. “Sellers can walk away from a sale with plenty of equity to put down on a new or bigger home, making moving up more affordable for them.”
Ryan Boykin, co-founder of Denver-based Atlas Real Estate Group, cautions, however, that having greater equity in your home doesn’t always translate to more profit during a sale.
“When homeowners see that their home has appreciated, they believe their worth increases as their home value increases,” Boykin says. “But the reality is that the value of your home is only as good as what someone is willing to pay for it, not what a report says it’s worth or what an appraisal says it’s worth.”
For home buyers, the aforementioned rising equity news is a mixed blessing. On one hand, increased equity may push more homeowners off the fence to sell, which frees up more inventory for buyers to choose from. On the other hand, it’s yet another sign that home prices are only going to get more expensive.
“For buyers, there should be a sense of urgency to try and get into the market prior to further appreciation,” Boykin says. “Yes, you can wait for prices to maybe come down, but the reason to get in the game today is because, even as prices continue to go up in almost all the country, you would likely pay more to rent a home than to buy one.”
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