Homeowners’ housing wealth grew by record numbers in 2020. According to CoreLogic’s Home Equity Report that was released This Week in Real Estate, homeowners gained an average of $26,300 in equity – the largest average equity gain since 2013 – and the aggregate increase was a record $1.5 trillion. Below are a few newsworthy events from the second week of March that influence our business:
U.S. Homeowners Gained Record $1.5 Trillion of Equity in 2020. According to CoreLogic’s latest Home Equity Report for the fourth quarter of 2020, U.S. homeowners with mortgages (which account for roughly 62% of all properties) have seen their equity increase by 16.2% year over year, representing a collective equity gain of over $1.5 trillion, and an average gain of $26,300 per homeowner, since the fourth quarter of 2019. As competition for the dwindling supply of for-sale homes drove prices up, average annual homeowner equity gains in the fourth quarter of 2020 reached the highest level since 2013. California, Idaho, and Washington experienced the largest average equity gains at $54,500, $48,500 and $47,200 respectively.
Will Rising Mortgage Rates Derail the Red-Hot Housing Market? The red-hot U.S. housing market may meet its match this year: rising mortgage rates. Thus far though, it doesn’t appear housing has been thrown too much off its stride. housing market watchers remain on edge as the climb in 10-year Treasury yields puts upward pressure on mortgage rates. Freddie Mac reported last week that the 30-year fixed-rate mortgage averaged 3.02% for the week ended March 4. The reading represents the first time since July 20 that the 30-year rate has been above 3%. A year ago at this time, the 30-year fixed-rate mortgage stood at 3.29%. “Since reaching a low point in January, mortgage rates have risen by more than 30 basis points, and the impact on purchase demand has been noticeable. While purchase activity remains high, it has cooled off over the last few weeks and is currently on par with early March, prior to the pandemic. However, the rise in mortgage rates over the next couple of months is likely to be more muted in comparison to the last few weeks, and we expect a strong spring sales season,” said Freddie Mac chief economist Sam Khater.
This is Nothing Like Last Time. 2020 was so strong that many now fear the market’s exuberance mirrors that of the last housing boom and, as a result, we’re now headed for another crash. However, there are many reasons this real estate market is nothing like 2008. One, mortgage standards are nothing like they were back then. During the housing bubble, it was difficult not to get a mortgage. Today, it’s tough to qualify. The Housing Credit Availability Index shows that lenders were comfortable taking on high levels of risk during the housing boom of 2004-2006. It also reveals that today, the HCAI is under 5 percent, which is the lowest it’s been since the introduction of the index. Two, prices aren’t soaring out of control. Annual home price appreciation between 2002 – 2005 was 8.5%, 8.7%, 12.5% and 11.4%, respectively compared to annual home price appreciation between 2017 – 2020 of 6.4%, 4.8%, 4.7% and 9.2%, respectively. Three, we don’t have a surplus of homes on the market. We have a shortage. There were too many homes for sale in 2007 and that caused prices to tumble. Today, there’s a shortage of inventory, which is causing an acceleration in home values. In 2007 there were 9.6 months of single-family inventory compared to 2.1 months in 2020. Four, new construction isn’t making up the difference in inventory needed. 2020 marked thirteen consecutive years below the 50-year average of single-family units completed. Five, houses aren’t becoming too expensive to buy. The affordability formula has three components: the price of the home, the wages earned by the purchaser, and the mortgage rate available at the time. Fifteen years ago, prices were high, wages were low, and mortgage rates were over 6%. Today, prices are still high. Wages, however, have increased, and the mortgage rate is about 3%. That means the average homeowner pays less of their monthly income toward their mortgage payment than they did back then. Six, people are equity rich, not tapped out. In the run-up to the housing bubble, homeowners were using their homes as personal ATM machines. Many immediately withdrew their equity once it built up, and they learned their lesson in the process. Homeowners have cashed out almost $500 billion dollars less than before.