A limited supply of houses for sale has helped push home prices higher and add to borrower equity.
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Despite the economic turmoil of the pandemic, home equity continued to climb in the second quarter of 2020, with the average homeowner gaining $9,800 in equity and negative equity falling 15% between the second quarters of 2019 and 2020, according to a new analysis by CoreLogic, a property data analytics provider.
Homeowners with mortgages, which account for roughly 63% of all properties, have seen their equity increase by 6.6% year over year. This represents a collective equity gain of $620 billion. Negative equity, also referred to as underwater or upside down, applies to borrowers who owe more on their mortgages than their homes are worth.
“Homeowners’ balance sheets continue to be bolstered by home price appreciation, which in turn mitigated foreclosure pressures,” said Frank Martell, president and CEO of CoreLogic. “Although the exact contours of the economic recovery remain uncertain, we expect current equity gains, fueled by strong demand for available homes, will continue to support homeowners in the near term.”
While national figures reflect a resilient housing market thus far into the recession, equity gains varied broadly on the local level. States with strong home price growth have continued to experience the largest gains in equity.
This includes Montana, where homeowners gained an average of $28,900; Idaho, averaging $21,200; and Washington, averaging $20,400. Meanwhile, New York, which was hit hard by the pandemic, experienced some of the lowest equity gains—averaging just $4,400—and highest negative equity shares in the second quarter of 2020.
As prospective buyers took advantage of record-low mortgage rates, strong demand, especially by younger home buyers, and the dramatically limited supply of houses for sale helped push home prices higher and add to borrower equity through June. However, the CoreLogic HPI Forecast shows home prices slowing through next summer. This could erode equity, which has been a buffer against increasing mortgage delinquency and the pressures of foreclosure.
However, with unemployment expected to remain elevated throughout the remainder of the year, CoreLogic predicts home price growth will slow over the next 12 months and mortgage delinquencies will continue to rise. These factors combined could lead to an increase of distressed-sale inventory, which could put downward pressure on home prices and negatively impact home equity.
“The CoreLogic Home Price Index registered a 4.3% annual rise in prices through June, which supported an increase in home equity,” said Frank Nothaft, chief economist for CoreLogic. “In our latest forecast, national home price growth will slow to 0.6% in July 2021 with prices declining in 11 states. Thus, home equity gains will be negligible next year, with equity loss expected in several markets.”