American homeowners are getting rich. Again!
There is no other way to read the financial information now coming out which shows that the value of American homes has risen significantly during the past year. For example, the National Association of Realtors says that home values have been rising nationwide for the past 20 months and that existing home values were up 11.6 percent in February when compared with last year.
Another common measure, the S&P Case Shiller index, shows that home values were up in 20 major cities by 8.1 percent during the past year.
These numbers represent real economic change for millions of American households. Much of the wealth held by American families is in the form of real estate equity, equity that suffered huge reductions following the mortgage meltdown. With rising home prices millions of homes are no longer financially underwater.
New Equity Increases
Just how much additional equity is now held by American homeowners?
The answer is enormous.
Figures from the Federal Reserve show is that in 2009 Americans had mortgage debt worth $10.36 trillion dollars and homes worth $17.17 trillion. That means there was equity valued at $6.81 trillion.
At the end of 2012, the latest period available, American homes were worth $17.65 trillion but mortgage debt had fallen to $9.43 trillion. Equity in 2012 stood at $8.22 trillion.
In a three-year period we have added $1.41 trillion in real estate wealth to the economy. This is a very big number, one which can be translated into higher sale prices, more equity and a greater ability to refinance.
However, the majority of equity growth seen today does not come from rising home values. It comes from declining debt. Americans are borrowing less.
Adding Some Balance
In looking at the new numbers it’s important to consider several big caveats.
First the housing sector remains fragile. It’s entirely possible that the gains seen in the past year could be lost if the economy weakens. The potential for a financial relapse is real and not helped by the reduction in federal spending now being seen in Washington as a result of the sequester logjam.
Second, the restoration of wealth seen nationwide is not happening everywhere. Some areas are coming back faster than others, while some metro areas remain depressed. Short sales and foreclosures remain widely available at discount, even in rebounding metro areas.
Third, we have yet to recapture the home values seen before the mortgage meltdown. The Federal Housing Finance Agency says January home values nationwide were 6.5 percent higher than a year earlier. That’s the good news. The bad news is that home values remain 14.4 percent below the peak reached in April 2007.
Still, more equity is good news. Let’s hope the trend continues.