Corelogic’s Home Equity Report analyzes changes in home equity from a number of different perspectives. Home equity can be used to predict default rates, and we saw a large number of strategic defaults early in the housing bust as professional investors realized they were better off walking away from a property and tossing the keys to the bank. The report also does a deep dive on negative equity, looking at it from a geographic perspective, as well as a loan-to-value (LTV) perspective. It also shows mortgage debt outstanding, and does a state-by-state breakdown.
Changes in home equity has been a major driver of consumer confidence and spending
Lately, the consumer confidence numbers have been increasing, and perhaps the reason is due to jumps in the home price indices, like Case-Schiller. While the biggest home price appreciation has been concentrated in a handful of metropolitan statistical areas (MSAs), prices have increased pretty much everywhere. It appears that even though all real estate is local, the knowledge that prices are increasing nationwide is putting consumers in a better mood.
Home equity drove much of the consumption during the bubble years. Increasing home prices made consumers feel richer, and they monetized that home equity by doing cash-out refinances and using the extracted equity for consumption. At times, it almost appeared that home owners were using their homes as ATMs.
Once the bubble burst, many home owners found themselves with negative home equity, which has had a number of pernicious effects. First, while the asset values have fallen, the value of debt has not, leaving Americans with a large debt burden to work through. This has been a particularly tough slog and has depressed consumer spending as savings have increased. Second, it has impacted labor mobility, which depresses the entire economy.
Internals of the report
Home equity increased 9% to $4.211 trillion from $3.859 trillion in the fourth quarter of 2012. The number of homes with negative equity fell to 9.7 million and aggregate negative equity fell from $631 billion to $580 billion. The top five states with positive equity are Montana, Alaska, North Dakota, Texas, and Wyoming. Unsurprisingly, the top five states with negative equity are Nevada, Florida, Michigan, Arizona, and Georgia. 57.2% of all home owners have at least 20% equity in their homes. The average equity is 32.8%. If prices increase another 5%, 1.6 million homes would attain positive equity.
Impact on home builders
Home builders, like Lennar (LEN), KB Homes (KBH), Standard Pacific (SPF), Toll Brothers (TOL) and Ryland (RYL), compete with existing homes for sales. The large number of homes with negative equity has restricted the supply of existing homes, driving many move-up home buyers to consider buying a new home as opposed to moving into an existing one. One potential issue for home builders is that new home equity will release pent-up supply which siphons off demand for new construction.
© 2013 Market Realist, Inc.