n 2012, when home prices finally bottomed out, over 15 million homeowners, 28.5% of all those with a mortgage, were underwater, with a loan balance larger than the market value of their home. Many were recent homeowners who bought during the housing boom and at the top of the market, but even long-term homeowners saw their often-considerable equity eroded, frequently to the point where they could no longer afford to sell or refinance their homes.
Five years and 56 consecutive months of rising home prices later, negative equity is a distant memory for most. Black Knight Financial Services said this week that one million homeowners regained positive equity in 2016, leaving 2.2 million, 4.3% of all those with a mortgage, underwater. In addition, there are now 39.5 million homeowners with combined loan-to-value (LTV) ratios of less than 80%. This means they have “tappable” equity-value that can be extracted from their homes through refinancing. Nationwide, the value of “tappable” equity now stands at $4.7 trillion, up nearly $570 billion in 2016 alone.
Homeowners are beginning to utilize this equity. In the fourth quarter of 2016 there were nearly a half-million cash-out refinances, 8% more than the previous quarter and 50% more than a year earlier. Thirty-one million in equity was cashed out, the highest quarterly total since 2008.
Owners Facing Conundrum
Will this continue? Black Knight notes that 78% of the tappable equity is held by 27 million homeowners who have credit scores over 720, making them prime candidates for cash-out refinancing. But, in the very definition of a conundrum, 68% of the equity belongs to borrowers who have interest rates below those available today.
Enter the HELOC. A recent survey by TD Bank shows these loans regaining popularity, especially among Millennials, more than a third of whom said they are considering applying for one in the next 18 months. This is more than twice the number of Gen-Xers with such plans, and nine times more than Baby Boomers.
Price increases did appear to slow, or at least pause in January, but CoreLogic, the first company to weigh in with February data, shows them accelerating again. Its Home Price Index rose 1.0% from January (when prices were up 0.7%) and were up 6.9% year-over-year, 0.1 percentage point more than the increase a month earlier.
As to the remaining 2.2 million underwater borrowers, several studies have shown their homes are disproportionately in the lower price tiers. These are also the homes enjoying the greatest appreciation, so perhaps they will soon be afloat as well.
Freddie Mac gave us some good news to close out the week. Mortgage rates were down for the third straight week with the 30-year fixed-rate mortgage averaging 4.10%. That is a 20 basis point decline since March 16. Call me to take advantage of these great rates!