Home Equity Is Back! It's Small, But It's Here To Stay
Homeowners are lining up again to use their homes as ATMs and the line is slowly beginning to wind out the door and around the corner.
For the first time since 2009, households are withdrawing more cash from their home's equity than they are depositing, according to Capital Economics "Return of housing equity withdrawal here to stay."
And this isn't just a temporary phase, thanks to the housing recovery, the improving economy and growing incomes giving homeowners more impetus to take on some discretionary spending.
"Rather than being a temporary blip, we think that this marks the start of a sustained period of equity extraction," according to the report.
What is home equity?
A word of caution about home equity: when you use it you lose it.
Home equity is the difference between your mortgage balance and the value of your home.
When you buy a home with a down payment of, say 20 percent, you have a 20 percent equity stake in your home. Over time, mortgage payments and appreciation can give you a larger equity stake.
Likewise, depreciation, like that from the housing crash, can reduce your stake and leave you "underwater" with a mortgage that's larger than the value of your home.
When it's available, home equity can be a handy, liquid emergency fund, investment pot, nest egg for retirement or a way to get out of more expensive debt.
Most financial advisers suggest using home equity only for capital improvements that give you a return on your money that's greater then the cost to use it - a viable business start up, financing kids' college education, certain home improvements, etc.
According to Capital Economics' report:
Home equity withdrawal (HEW) turned positive in in the fourth quarter 2012, reaching $13.7 billion or 0.5 percent of disposable income. The finding came earlier than Capital Economics had forecast.
Capital's report concedes, other HEW measures show HEW may still be in negative territory. Either way, little, if any equity was injected into the housing sector by the end of 2012.
Previously, HEW briefly turned positive in 2009 before heading back into negative territory, but the current return to HEW appears more sustainable.
HEW today most commonly happens when homeowners move up, rather than take out home equity loans. Capital said HEW is closely correlated with the number of home sales through "turnover extraction" which happens when the a homeowner moves up and the new mortgage is larger than the previous mortgage, effectively resulting in HEW.
Rising home prices, growing confidence in the housing recovery, increasing incomes and a gradual loosening in mortgage credit conditions should continue to make home equity lending and cash-out refinancing - the other two main sources of equity withdrawal - even more common.
Don't expect a HEW boom. Home prices are still well off peak prices of the last boom. At the current pace of home price increases, boom-time prices remain years away. Losses inflicted during the housing crash wiped out 50 percent or more of home values in many areas.
What HEW has returned is a positive indicator for the housing recovery and the economy in general, given consumer spending increases with home equity gains and consumer spending fuels the economy.
Written by Broderick Perkins
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