Homeowners Preserve Rising Equity

The Mortgage Corner

Graph: MarketWatch/Black Knight

American homeowners have amassed a record $6 trillion in equity in their properties, according to a study by real estate data firm Black Knight, a figure boosted by surging home prices and a trend of owners staying put longer. But rising interest rates and caution resulting from the housing troubles of a decade ago are limiting how much of that equity is getting tapped.

“As the second quarter came to a close, the total amount of tappable equity available to homeowners with mortgages surpassed the $6 trillion mark for the first time in history,” said Ben Graboske, executive vice president of Black Knight’s Data & Analytics division. “There is now $636 billion more tappable equity available than at the start of 2018, and nearly three times as much compared to the bottom of the market in 2012.”

Homeowners are staying in their homes longer in part because of fears of another housing bust that was part of the Great Recession, in other words. In 2016 and 2017 sellers had stayed in their homes a median 10 years, up from a median of six years all the way back to 1985. This is also because there are fewer homes to buy as housing inventories have shrunk drastically.

Inventory of starter and tradeup homes were down 12-13 percent compared to a year ago, one of the biggest drops in years, Trulia chief economist Ralph McLaughlin said. McLaughlin is hoping that rising home prices will entice more owners to sell, even though mortgage rates have risen from their low of 3.5 percent to 4.25 percent for a 30-year fixed conforming loan with a 1 point origination fee. But that is still historically low, when fixed mortgage rates were in the 6 percent range just a few years ago, and even as high as 16 percent in the mid-1980s.

Existing-home sales are still strong, however, according to the National Association of Realtors. Total existing-home sales, https://www.nar.realtor/existing-home-sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, did not change from July and remained at a seasonally adjusted rate of 5.34 million in August. Sales are now down 1.5 percent from a year ago (5.42 million in August 2017).  

Lawrence Yun, NAR chief economist, says the decline in existing home sales appears to have hit a plateau with robust regional sales. “Strong gains in the Northeast and a moderate uptick in the Midwest helped to balance out any losses in the South and West, halting months of downward momentum,” he said. “With inventory stabilizing and modestly rising, buyers appear ready to step back into the market.”

Graph: Calculated Risk

Higher interest rates aren’t stopping new homes from being built, either. August Housing starts jumped 9.2 percent to a 1.282 million annualized rate which is well above July's upwardly revised 1.174 million rate, according to the U.S. Census Bureau. But permits, which are the forward looking component of the report, fell 5.7 percent to a 1.229 million rate.

Looking at starts, multi-family construction that has slowed 29 percent to a 406,000 rate for year-on-year growth, which had been in the negative column, was up 38 percent. Single-family homes, which are the more important of the readings, rose 1.9 percent to an 876,000 rate that, however, is fractionally lower than a year ago, down 0.2 percent.

Where do interest rates go from here? The Conference Board has predicted economic growth could average 3 percent or higher for the rest of this year, which will continue to boost interest rates somewhat. Their leading economic index rose 0.4 percent in August following even stronger gains in the prior two months, the Conference Board said Thursday. The LEI is a gauge of 10 economic indicators meant to signal peaks and valleys in the business cycle and the broader economy.

But our take is there just isn’t enough consumer demand to push rates much higher. Consumers have been paying down their overall debt as a percentage of household income, as well as borrowing less. It is corporations that loaded up on easy money the past several years and now have to worry about paying it back if there is a downturn.

Harlan Green © 2018

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