Harvard: Home Equity Returning to Pre-Crisis Levels, Housing Stock Lags

Primarily caused by rising home prices and modest increases in mortgage debt, the aggregate value of home equity more than doubled in the years between 2011 and 2018. This is according to the 2019 edition of the State of the Nation’s Housing report from the Harvard Joint Center for Housing Studies (JCHS), released on Tuesday.

According to the Federal Reserve’s Flow of Funds data, home equity levels are nearly back to the levels they were preceding the 2008 financial crisis.

“According to the Federal Reserve’s Flow of Funds Data, the total value of home equity held by households jumped from $7.0 trillion to $15.5 trillion over this period after adjusting for inflation,” the report reads. “With this increase, home equity levels are approaching the pre-crisis peak of $17.0 trillion while aggregate mortgage debt remains closer to the post-crisis low.”

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While a recorded growth in the levels of home equity would seem to indicate that more people may be able or willing to engage in transactions that allow homeowners to extract that equity, this report says that there is little evidence that this is actually occurring.

“A 2018 report from the Federal Reserve Bank of New York concludes that there is no evidence so far of a substantial increase in risky equity extraction practices,” the report reads. “Although the aggregate volume of cash-out refinances and home equity loans and lines of credit has risen slightly in recent years, withdrawals remain near their 2000 level and well below the peak during the housing boom. In addition, recent equity extractions have been concentrated among older borrowers and those with the strongest credit.”

Additional data also confirmed that in cases where home equity was extracted, the application of those funds was primarily debt-related for homeowners.

“Results from the National Survey of Mortgage Originations indicate that homeowners that did tap their home equity in 2016 used the funds to pay down higher-cost debt (49 percent of extractions) or cover home repairs and improvements (40 percent),” the report details. “Smaller shares of respondents reported using all or part of the extracted equity for savings or business investment (23 percent), auto or other major purchases (11 percent), or college expenses (8 percent).”

The demographic shifts taking place due primarily to the aging of both the baby boomer generation and generation X, along with the increasing prevalence of millennial homeowners will also have a transformative effect on the housing landscape, the report details. Population growth by itself will also add roughly 8 million households to the ranks of homeowners between 2018-2028.

“Over the decade, the aging of the baby-boom generation is expected to boost the number of homeowners age 65 and over by some 8.4 million, lifting their share of all homeowners to 38.1 percent,” the report reads. “Meanwhile, members of the millennial generation will drive up the number of homeowner households aged 30–49 by just under 1.9 million, to 30.2 percent. In contrast, the aging of generation-X will reduce the number of homeowners aged 50–64 by 2.1 million, to a share of 27.1 percent.”

Demographic shifts that are this broad will bring “substantial changes in the housing needs and preferences” of homeowners that could have the potential to alter the configuration of owner-occupied housing stock, the report says.

In terms of broader housing trends described in the report, the JCHS details that the United States’ generally sound economic footing and rising incomes have led to indications that the number of people forming households across the country has finally returned to a more normal pace. What hasn’t returned to a normal pace, however, is the construction of new housing stock to meet the needs of an evolving housing landscape.

“The 2019 State of the Nation’s Housing report from the Harvard Joint Center for Housing Studies documents how the housing shortfall is keeping pressure on house prices and rents, eroding affordability for modest-income households in many markets,” said a press release announcing the report.

Read the full report for more details.

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