Home Equity Wealth at New High

The latest flow-of-funds data from the Federal Reserve confirmed that home-equity wealth reached a new nominal high this year:  $13.9 trillion at mid-2017, $0.5 trillion above the 2006 peak and more than double the $6.0 trillion amount at the trough of the Great Recession.[1]  While several factors will affect aggregate home equity, it’s clear that much of the recovery in home-equity wealth is due to the rebound in home values: The S&P CoreLogic Case-Shiller Index for the U.S. was up 40 percent (seasonally adjusted) through June from its February 2012 nadir.

Comparing annual home-price growth with the annual change in home equity per homeowner shows a strong correlation (Exhibit 1).  When prices are stagnant of falling, equity typically declines.  Conversely, price growth generally supports equity accumulation, with faster appreciation leading to larger amounts of equity creation.  Home-equity wealth is an important component of family savings, accounting for about 20 percent of homeowners’ net worth, on average.[2]

Home-value growth has also restored net worth to many homeowners who had negative equity.  At the end of 2009, 12.2 million homeowners had negative equity, or 26 percent of all owners with a mortgage.  Price appreciation, along with amortization and loan curtailments, has helped pull ‘underwater’ owners ‘above water.’ (Exhibit 2) For example, if all homes rise in value by 5 percent during the next 12 months, about 500,000 homeowners will regain a positive net housing wealth position.

Of course, price appreciation is not uniform but varies across neighborhoods.  Nationally, 5.4 percent of homeowners with a mortgage had negative equity at mid-year, but that percentage varied from zero to about 20 percent across counties. (Exhibit 3) Among the more populous counties, the negative equity percentage varied from 0.5 percent in San Mateo (California) to 16.8 percent in Osceola (Florida).  Areas where home values have recovered and are above their pre-recession peak tend to have the lowest percentage of negative equity homeowners, and some of the largest home-equity wealth amounts.

If there is a 5 percent rise in the S&P CoreLogic Case-Shiller Index in the coming year, then we should see an additional $1 trillion in home-equity wealth created, setting another new high.

[1] Federal Reserve Statistical Release Z.1, “Financial Accounts of the United States,” Second Quarter 2017, Table B.101, rows 4 and 33.

[2] The ratio of mean home-equity wealth to mean net worth for homeowners was 20.4% in 2013 and 19.1% in 2016; see “Changes in U.S. Family Finances from 2013 to 2016: Evidence from the Survey of Consumer Finances,” Federal Reserve Bulletin, September 2017 (Vol. 103, No. 3), pp. 13 and 26.

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