Rising Real Estate Prices Boost Home Equity Across Country

U.S. home prices were 6.6% higher in May 2017 than the same point in 2016, pulling home equity up along with it.

“For current homeowners, the strong run-up in prices has boosted home equity and, in some cases, spending,” said Frank Martell, the president and CEO of real-estate research firm CoreLogic, in its latest report on nationwide home price trends.

The list of states that saw the biggest gains in CoreLogic’s Home Price Index — a proprietary metric that takes into account various single-family home price factors — should be familiar to RMD readers who follow equity trends: Washington State home prices jumped 12.6% year-over-year, followed by Utah with 10.4% and Colorado at 9.7%.


Those states have frequently topped recent lists of states with the greatest home equity gains, and have also generated significant Home Equity Conversion Mortgage growth: As RMD reported yesterday, reverse mortgage endorsements in Colorado between January and April 2017 are running 69% higher than at the same point in 2016, while Washington and Oregon saw jumps of more than 30% each during that span.

Denver also claimed the top spot among metropolitan areas, with 9.2% year-over-year home price growth. Las Vegas, San Diego, Los Angeles, and Boston rounded out the top five.

“The market remained robust with home sales and prices continuing to increase steadily in May,” CoreLogic chief economist Frank Nothaft said in the report. “While the market is consistently generating home-price growth, sales activity is being hindered by a lack of inventory across many markets.”

Though these trends generally spell good news for homeowners and those potentially looking into tapping home equity in retirement, the same forces work against renters and first-time homebuyers, CoreLogic noted: Rents for affordable housing units are rising significantly faster than inflation, and new buyers are facing higher-than-expected sticker prices.

Read CoreLogic’s full report here.

Written by Alex Spanko

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  • What rising prices demonstrate is that the home equity equation is dynamically determined as the difference between two independent variables. Reverse mortgage balances generally have a potentially lower volatility range after closing than home values on measurement dates. That was fully demonstrated in the collapse of the mortgage market in 2006, 2007, and 2008 based on the location of the property in the US. If there was no formal appraisal, most values were based on mere gut instinct. Some instincts were more knowledgeable and realistic than others.

    Our way of presentation is to have a controlled rise in the value of home (called the appreciation rate) and then allow the loan to grow by a fixed interest and MIP rate. While the MIP rate is fixed, only the margin portion of the note interest rate is fixed over the life of a variable rate HECM. So we lose any sense of just how dynamic the equation really can be in our amortization schedules. This is not just sad and misleading but a poor representation of what happens when borrowers get a variable rate HECM.

    Home equity does not always rise when home prices do. An interest index can suddenly rise by four or five full points in just a couple of months and stay there awhile. Our industry fails at bringing to our attention just exactly what happens in real life but is definitely much different than what our bland amortization schedules present. For example, even though the index rate is no different in urban Maryland than in the Cumberland Gap the appreciation rates are generally going to be very different in real life over a ten or twenty year period.

    The appreciation rate in Marina Del Rey, CA is far different than that actually experienced in Bonnie Bell, CA. Seniors in Marina Del Rey can expect that the appreciation in their homes will normally rise far more quickly than the interest and MIP on a HECM; those in Bonnie Bell, not so much. HUD can expect to keep all MIP collected on homes in Marina Del Rey but is at risk of paying out more in reimbursement than the MIP it collects on the home in Bonnie Bell. Yet the amortization schedules reflect the same assumptions about the interest rates (not the amount but the use of the expected interest rate) and the appreciation rates (generally 4%). Common sense says that is ridiculous and unreliable but that is the way things work.

    Until our industry conforms more to the general economics in each location, our schedules and financial information will seem either too good to be true or just unrealistic by those who understand the marketplace. The current problem is that most of our schedules are prepared more with litigation issues in view than depicting the most likely outcome at the time of preparation. We could have full and adequate disclosures but who wants to mess around with a possible defense of our schedules in court. Yet we need to strive to make our schedules more realistic with more characteristic varying rates of interest reflected in the balances due and appreciation on the home. It might take a few amortization schedules to be incorporated into each set of mortgage documents but perhaps that is but yet another way to avoid the perception of HECMs being too good to be true.

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