Harney: Americans Collectively Building More Home Equity Than Widely Believed

With the nation’s most effervescent local markets simmering down, the overall real estate focus is turning to something much more fundamental: Florida home equity.

• How big is the home equity cushion you are sitting on?
• How much more is your home worth compared with the debts you’ve got loaded on it (in other words, your first and second mortgages, and additional lines of credit)?
• Do you have a 20 percent equity stake? Less than 10 percent?

The common perception is that Americans are turning into debt fiends, unwisely depending on exotic loans, hocking their houses to the hilt, and banking on the pattern of double-digit appreciation rates to bail them out. But a new analysis of home equity holdings suggests that the reality is much more balanced, according to syndicated columnist Kenneth Harney of the Realty Times.

It is true that a surprisingly large percentage of recent home buyers are sitting with minimal (even negative) home equity levels. But on the other hand, and for the most part, homeowners have substantial net equity holdings — a record $11 trillion, almost double what they amassed just five years ago. The results were garnered from mortgage and real estate valuation databases maintained by First American Real Estate Solutions of Santa Ana, Calif., a giant title insurance, credit, and settlement services company.

Appraisal or valuation information on 26 million homes in 36 states, plus loan file data on approximately 20 million active mortgages originated in 2004 and 2005, was used in the study. Some findings do correspond to the stretched-thin, debt-laden portrayals of today’s homeowners and borrowers by the media:

• Nearly one out of 10 was in a zero or negative equity position as of Septembe 2005. Five percent were in negative territory by more than 10 percent — in order words, their combined mortgage debts exceeded their home’s value by more than that amount.
• Nearly 30 percent have equity cushions of less than 20 percent.
• About 44 percent have less than a 30 percent cushion.
• To use some state-by-state examples, more than 28 percent of Colorado buyers or refinancers had less than 5 percent equity in their properties, with about 24 percent of Ohio owners in the same situation. These circumstances apply to 13 percent in Washington, D.C., and around 11 percent in California and Florida.

Equity levels are important measures of financial health and a key component of net worth. The less equity one has, the more vulnerable one is to economic shocks and rising mortgage rates. An owner could find himself walking away with little or nothing at the end of a sale if forced to make one quickly, and a decline in property value could send those with smaller equity stakes to the negative side.

Overall, however, the state of home equity holdings is not nearly so dire. The First American study cites Federal Reserve research which found that most of America’s homeowners have plenty of equity — 57 percent, on average, as of the third quarter of 2005. The figure was practically identical — 58 percent net equity — five years ago, when the housing boom kicked into high gear.

Household equity varies by how close mortgages are to maturity, among other factors. Eight out of 10 people who took out their mortgages in 1985 have equity stakes of 75-80 percent, thanks to paydowns of principal as well as overall price inflation. Similarly, sixty-five percent of borrowers whose loans date to 1990 have 50-55 percent equity, while about half of those who bought or refinanced in 2001 have grown their stakes to 25-30 percent.

The most recent borrowers tend to be the thinnest, thanks to high home prices, piggyback loans, “option” plans, low down payments and other factors that limit the accrual of equity. Nearly 30 percent of 2005’s borrowers are in 0- (-5) percent equity positions. Some of those low-equity homeowners who face hefty payment ”resets” on interest-only and negative amortization loans in the coming two to three years may end up in a bind.

But most need not worry, and if you do, you can still stave off the damage. The bottom line? If you have a low-equity Florida home loan with a reset coming in the future, plan ahead now. Make sure you are in position fiscally to handle what’s in store. Do not risk the equity you already have, plus the equity you’re almost certain to grow in the future, by failing to see the big picture.