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Fast-rising home prices may be a roadblock for buyers, but they are putting some homeowners on Easy Street. As home prices rise, so does the percentage of home equity for those owners with a mortgage.
Home equity jumped 13.3 percent in the first quarter of this year compared from a year earlier, according to CoreLogic. For the average borrower, that translates to $16,300 in additional home equity gained during the year, or a collective $1.01 trillion. That is the biggest gain in four years.
Despite the big value gains in the past few years, 2.5 million borrowers or 4.7 percent of all homeowners with a mortgage are still underwater on their home loans, meaning they owe more than the homes are currently worth. However, in the first quarter of this year, 84,000 borrowers came up from underwater, regaining equity.
The negative equity rate fell 21 percent from a year earlier, when just over 3 million borrowers were underwater. Negative equity peaked in 2009 at 26 percent of all mortgaged properties.
"Home-price growth has accelerated in recent months, helping to build home-equity wealth and lift underwater homeowners back into positive equity, the primary driver of home equity wealth creation," said Frank Nothaft, CoreLogic's chief economist. "The CoreLogic Home Price Index grew 6.7 percent during the year ending March 2018, the largest 12-month increase in four years."
As with everything in real estate, the gains vary depending on location. Homeowners in Washington state, where prices are soaring, gained an average $44,000 in home equity, while Californians gained an average $51,000.
"In the far Western states, equity gains are fueled by a long run in home price escalation. With strong economic growth and higher purchase demand, we expect these trends to continue for the foreseeable future," Nothaft said.
Gains in home equity are likely fueling the boom in home remodeling. They are not, however, pushing homeowners to list their homes for sale, because trading up is so expensive and the supply of homes for sale is so lean.
Those still in a negative equity position are also stuck in place because they would have to spend money to get out of their mortgages. They, too, are adding to the supply crisis.
Ironically, homeowners gaining equity and homeowners with negative equity are part of the reason home prices are rising so quickly. Supply is so lean and demand is so strong that new listings are moving very quickly and the majority are selling above list price. Bidding wars are fast becoming the norm.
In April, it took a record of just 64 days to sell the average home, from listing to closing, according to Trulia. That is nine days faster than in April 2017. The previous record was set in July at 71 days. Not surprising, homes in Western states are moving fastest. And that is the total sale time. Homes are going under contract, on average, in just 26 days, according to the National Association of Realtors.
"What is available for sale is going under contract at a rapid pace," said Lawrence Yun, chief economist for the Realtors. "Since NAR began tracking this data in May 2011, the median days a listing was on the market was at an all-time low in April, and the share of homes sold in less than a month was at an all-time high."
Without much additional new inventory, the supply-demand imbalance is likely to persist, keeping home prices high and adding housing wealth to consumers' wallets. That could result in higher spending, especially on home improvement and repair projects.