After hitting a low of $6.45 trillion in the final quarter of 2011, Americans’ combined home equity jumped 20% during the next nine months to $7.71 trillion.
A homeowner’s equity is the difference between the market value of his or her house and the amount of mortgage debt it is carrying. If your real estate would sell for $400,000 and you have a mortgage balance of $200,000, your equity is $200,000.
Equity is a key measure of wealth — often the largest single item on a family’s financial balance sheet — and the Federal Reserve tracks the estimated equity holdings of millions of owners to come up with its quarterly numbers. As recently as 2007, homeowners’ collective equity exceeded $10.2 trillion. Between that year and late 2011, owners lost nearly $4 trillion in real estate wealth.
So the $1.3-trillion turnaround during the first nine months of 2012 was a big deal. It reflected the first sustained rebound in home prices in a long time in many — though not all — local real estate markets. In a study released just before Christmas, researchers at Zillow.com found that of 177 major metropolitan markets, 135 had experienced net increases in cumulative home values during 2012.
Zillow broke it down into specific dollar amounts added to owners’ net worth, city by city: Owners in Los Angeles gained a cumulative $122.1 billion during the year; Washington, D.C., owners gained $40.4 billion; San Diego, $31.2 billion; Seattle, $20.1 billion, Boston just under $16 billion; Tampa, Fla., $8 billion: Sarasota, Fla., $5 billion; Tucson, $3.8 billion; Oklahoma City, $3.3 billion; and Columbus, Ohio, $3.5 billion.
These are big numbers and hard to grasp, but think of it this way: The odds are good that even if you own a home in a market that experienced severe price declines during the housing bust, the value of your home rose last year, at least modestly. Even if you have negative equity, it’s likely that, thanks to appreciation in your area and your continuing payment of principal on your mortgage, your equity position improved.
Some of the most impressive gains in values were in areas that suffered the deepest price plunges — and the most painful losses in owners’ equity — between 2007 and 2011. According to a study by Realtor.com, list prices of houses in Phoenix were 21.4% higher in November than they were 12 months earlier. In the Riverside-San Bernardino metropolitan area, prices were up 13.3%; in Las Vegas 10.6%; and in Miami 10%.
What’s causing price surges like these in cities that cratered just a few years back? Part of it is a recognition by buyers, including investors, that prices hit bottom and won’t drop any further. The intrinsic economic value of houses and land simply exceeded the near-giveaway, foreclosure-sale prices prevalent in the post-recession years. Now prices are correcting upward as buyers come back into the market.
But something else has been at work: Virtually all major real estate markets across the country have seen declines in the availability of homes for sale, in part because some sellers still fear that they won’t get a good price, and because in some areas large numbers of potential sellers are still underwater on their mortgages. In Seattle, there were 43% fewer homes listed for sale toward the end of 2012 than at the same time the year before. In San Francisco, the deficit was 415; in Los Angeles 37.5%; and in metropolitan Washington around 28%.
Fewer listings mean more competition for what’s available for sale. That can bring multiple offers, higher prices and even the return of escalation clauses in contracts, where buyers’ offers contain automatic increases in multiple bid situations. That’s already well underway in parts of California, the Pacific Northwest and Washington, D.C., among other areas.
Ultimately, higher prices should begin to convince more sellers that they should list their homes, pushing inventory higher and creating a healthier, more balanced real estate environment for 2013.
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