The last several years have been dominated by headlines of underwater borrowers and negative equity.
In fact, it wasn’t long ago that about a quarter of all Americans with a mortgage we’re in a negative equity position, leading Merriam-Webster to give the word “underwater” a new meaning.
Let’s not forget underwater mortgage insurance either, which promises to protect you if you need to sell, even if you’re mortgage outweighs your asking price.
But we’re finally seeing a shift back to normalcy, that is, mortgages with principal balances that don’t exceed the associated property value.
You can thank surging home prices for that, which have increased so much in the past few years that some states are testing new all-time highs.
Homeowners Actually Have Equity!
As a result of all that appreciation, and to some extent tighter mortgage underwriting standards, millions of homeowners actually have equity in their homes.
It’s almost comical that this is headline-worthy, seeing that all homeowners should have a nice cushion of equity in their homes, but this is the world we live in these days.
Gone are the days of 20% down that guaranteed all homeowners would be able to sell, even if home prices didn’t perform as expected.
Instead, we’re still dealing with the consequences of zero down, which thanks to HARP, lots of loan modifications, and good old-fashioned time, are starting to abate.
Home Equity Levels Highest Since 2007
It might sound rather ominous, but home equity levels haven’t been higher since 2007, according to the latest Mortgage Monitor Report from Black Knight Financial Services.
Total home equity now stands at $7.6 trillion, up nearly one trillion from a year ago and $825 billion year-to-date. It’s also nearly two-and-a-half times the amount recorded at the end of 2011, when underwater was the word on everyone’s mind.
The company noted that over 37 million homeowners have what they refer to as “tappable” equity. That is, equity that can be pulled from the home via a cash-out refinance or home equity line/loan.
In fact, 59% of the nation’s equity ($4.5 trillion) is now available for tapping based on a maximum 80% combined loan-to-value ratio (CLTV), which is the conservative limit most lenders impose these days.
For homes in the bottom 20 percent of property values, the average homeowner can pull out about $42,000, whereas those in the top 20 percent can pull as much as $267,000.
Nationwide, the average amount of home equity available for the taking is $120,000, a figure that has risen $19,000 from one year ago.
But Home Equity Lending Has Yet to Take Off
Despite this impressive increase in equity, most borrowers have yet to take advantage, perhaps because they don’t realize their homes are worth as much as they are, or maybe because they locked in a low rate via a rate and term refinance.
Black Knight did note that second mortgage lending is on the rise, up 40% year-over-year, but still 85% below levels seen in 2007.
It’s unclear if it’ll get anywhere near those levels though, seeing that 100% CLTV cash-out refinances aren’t available anymore.
Amazingly, 39% of the $4.5 trillion in tappable equity can be found in the state of California, where home prices have chalked amazing gains of late. And Los Angeles alone accounts for 14% of the nation’s available equity.
Overall, the top 10 states account for 74% of tappable equity, while the top 10 metros account for over half.
The concern is if this equity gets tapped again, borrowers could be in for payment shock as HELOCs tied to the prime rate rise as the Fed raises rates. Couple that with another home price correction and the underwater headlines return.