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America's housing market is heating up again, fortifying the finances of current homeowners and frustrating potential first-time buyers.
After hitting bottom in 2012, home prices took off dramatically before leveling off a bit in mid-2014. In the last two months, though, they turned higher again. The amount of equity homeowners now have — the value outside their mortgage debt — has doubled in the last five years, according to CoreLogic.
The latest read on September home prices showed a 6.3 percent annual gain, a touch bigger than August and a clear sign that prices are heating up again after cooling through much of spring and summer.
"Home-equity wealth has doubled during the last five years to $13 trillion, largely because of the recovery in home prices," said Frank Nothaft, chief economist for CoreLogic. "Nationwide during the past year, the average gain in housing wealth was about $11,000 per homeowner, but with wide geographic variation."
All real estate is local, and while most states show gains in home values, the variance is wide. Connecticut and Alaska are the only states seeing annual price declines. For Connecticut, it is jobs plain and simple. The loss of major employers there, like General Electric's decision to move its headquarters to Boston, have hit the housing market hard.
Other states, like Arkansas, New Jersey, North Dakota, Oklahoma, Wyoming, Maine and Maryland, are barely in the black. On the flip side, as tech companies flee California, nearby states like Washington and Oregon are seeing double-digit home price gains, with Colorado and Utah not far behind.
Homeowners today show more wealth on paper, but they are not extracting it at nearly the rate they did during the last housing boom. Near-record-low mortgage rates have certainly prompted thousands of borrowers to refinance and lower their monthly payments, but a very small share have extracted cash in these refinances and home equity lines of credit (HELOC).
"That weakness of active home equity withdrawal looks in large part to reflect tight credit conditions. Although lenders have reported loosening lending standards for HELOCs in each of the past 15 quarters, that easing has been modest compared to the conventional mortgage market," wrote Matthew Pointon, property economist with Capital Economics. "Indeed, median credit scores for new HELOC originations have not declined at all over the past couple of years, despite the serious delinquency rate on those loans dropping to its lowest since records began in 2008."
So homeowners get richer, and those trying to become homeowners have to face not just higher prices, but a severe lack of homes for sale, especially at the entry level. There is clearly demand, just not enough supply.
"After all, measures of home purchase sentiment are elevated, and there is evidence that first-time buyers are making a welcome return to the market," added Pointon.
They are returning, but still not hitting their historically normal share of homebuyers. While the National Association of Realtors reported a jump in first-time buyers in September sales, other measures show they have been dropping pretty steadily from a high of 40 percent in May to 34.8 percent in September, according to Campbell/Inside Mortgage Finance. That was the lowest level recorded since April 2014.
The slowdown in first-time buyers is likely due to higher home prices. First-time buyers are much more price-sensitive than the rest of the market, and they are also more limited in credit availability.
Housing affordability is now below average in half of the nation's top 20 metropolitan markets, according to John Burns Real Estate Consulting. These include Denver, Houston, Austin, Texas, and Nashville, Tennessee.
"This means that they are at high risk of a sharp price correction whenever the next recession hits," the Burns researchers said.