Rising home equity lifts many underwater homeowners

The numbers of homeowners that owe more on their homes than they are worth are falling as home equity continues to rise in many real estate markets.

Research firm CoreLogic estimates that, in 2016, 1 million fewer homes had what’s known as negative equity, also called being underwater and upside down. As of last year’s fourth quarter, there were 3.17 million residential properties where owners owed more than the homes were worth -- a 25 percent decrease from 4.23 million during the same period a year earlier. 

Negative equity peaked in 2009 at 26 percent of all properties. The figure now stands at 6.2 percent.  Homeowners in this predicament are often in low-income neighborhoods.

In the 10 most populous U.S. metropolitan areas, the San Francisco region had the highest percentage of properties where homeowners owe less than they are worth. (99.4 percent), followed by Houston (98.5 percent), Denver (98.5 percent), Los Angeles (97 percent) and Boston (95.3 percent). 

The Miami area, whose real estate market was hit hard during the recent recession, had the highest percentage of properties that were upside down, followed by Las Vegas (15.5 percent), Chicago (12.6 percent),  Washington, D.C. (8.4 percent) and New York City (5.1 percent).

Tighter credit standards will make it more difficult for borrowers to turn their home equity into quick cash as they did during the financial crisis.  According to the Federal Reserve Bank of New York, balances on home equity lines of credit were $1 billion as of the end of last year, little changed from 2015. Debt payments as a percentage of total disposable income are at a 35-year low, while consumer confidence is at a 15-year high.

Homeowners saw their net equity rise 11.7 percent,  or $78 billion, to $7.5 trillion, in 2016, CoreLogic indicated. On average, home equity rose on a year-over-year basis by $13,700,  fueled by home price increases. Helping this trend: One-fourth of all outstanding mortgages have terms of 20 years or less, which obviously amortize quicker than standard 30-year home loans.

Gains in home equity were strongest in high-end markets where prices posted double-digit increases, such as Washington and Oregon. These two states saw home equity gains of $31,000 and $27,000 respectively, double the overall U.S. rate, noted CoreLogic’s chief executive, Frank Martell.