While homeowners in areas of central California and Michigan watch their home equity disintegrate thanks to second mortgages and falling home prices, those in small cities like Beaumont, Texas, and Charleston, W.Va., are doing just fine.
Homeowners in Beaumont were largely insulated from the price run-ups of the housing boom. As a result, values there have remained relatively stable. Property owners have the highest home equity in the country, or 75% of their properties' value. Charleston ranks fourth at 67%.
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Three southern cities round out the top five. Corpus Christi, Texas, ranks second at 72%; Gulfport, Miss., lands behind it with 71%; and El Paso, Texas, ranks fifth with 67%.
While these numbers are dropping in year-over-year terms, the spread is a country mile from places like Sacramento, Calif. or Grand Rapids, Mich., where home equity levels are a dismal 28%, falling, respectively, from 57% and 46% just two years ago.
Behind the Numbers
Using data from Moody's Economy.com, we looked at the country's 200 largest metro areas to determine which are retaining home equity in the face of a nationwide housing softening. Housing values have dropped by 7.7% nationwide since last year, according to the National Association of Realtors, and are down by as much as 20% in cities such as Los Angeles, Tampa, Fla., and San Diego.
Most cities on the list are places that didn't see much price appreciation while much of the rest of the country went wild flipping properties for higher profits.
Risky loans and generous credit practices make a significant difference as well. Since home sale prices weren't appreciating quickly, there weren't many banks extending home equity lines of credit or second mortgages. For example, only 4.5% of residents in Charleston have second mortgages or second mortgages and home equity loans, according to the U.S. Census. This is comfortably under the national median of 6.4%, and nowhere approaching the 16% levels found in foreclosure hot spots like Fort Collins, Colo.
"It's less about house prices and more about debt level," says Mark Zandi, chief economist at Moody's Economy.com, on cities like Corpus Christi, Texas, or Charleston, W.Va. "The proportion of homeowners that have no mortgage debt is higher; there are smaller, less expensive homes and older houses."
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But working-class towns aren't the only areas boasting high home equity. Metros like Santa Cruz, Calif., which includes high-end destinations such as Monterey and Carmel by the Sea, and Nassau and Suffolk Counties in New York, which boast multi-million-dollar vacation homes in the Hamptons and Gold Coast spreads populated by Wall Street commuters, aren't seeing significant home equity drops.
Why? Because when you're buying a $40 million beachfront home in East Hampton, or a $15 million home on Pebble Beach, you're likely paying with cash. Resetting mortgage rates, trouble with piggyback loans and refinancing headaches don't matter because there isn't a mortgage for them to affect.
In those cases, the only way a home can wind up underwater is if the sea levels rise.
But high home equity figures don't necessarily insure prosperity for the coming year. Still, it will likely insulate the cities on this list, to some degree, from the pitfalls of low equity including decreased tax base for local governments and lower consumer spending thanks to lower net worths. More than anything, it means these cities have a better outlook should the housing downturn continue into the next decade.