A key market update for investors: The state of homeowner equity (Part 2 of 5)
Corelogic puts out a quarterly report on aggregate home equity in the U.S.
Corelogic’s Home Equity Report analyzes changes in home equity from a number of different perspectives. Investors can use home equity to predict default rates, and we saw a large number of strategic defaults early in the housing bust as professional investors realized they were better off walking away from a property and tossing the keys to the bank. The report also does a deep dive on negative equity, from a geographic perspective, as well as a loan-to-value (LTV) perspective. It shows mortgage debt outstanding as well, and it does a state-by-state breakdown.
Changes in home equity have been a major driver of consumer confidence and spending
Lately, the consumer confidence numbers have been strong, and perhaps the reason is jumps in the home price indices, like Case-Shiller. While the biggest home price appreciation has been concentrated in a handful of metropolitan statistical areas (MSAs), prices have increased pretty much everywhere. It appears that even though all real estate is local, the knowledge that prices are increasing nationwide is putting consumers in a better mood.
Home equity drove much of the consumption during the bubble years. Increasing home prices made consumers feel richer, and they monetized that home equity by doing cash-out refinances and using the extracted equity for consumption. At times, it almost appeared that homeowners were using their homes as ATMs.
Once the bubble burst, many homeowners found themselves with negative home equity, which has had a number of pernicious effects. First, while the asset values have fallen, the value of debt has not, leaving Americans with a large debt burden to work through. This has been a particularly tough slog and has depressed consumer spending as savings have increased. Second, it has impacted labor mobility, which depresses the entire economy.
Internals of the report
Home equity increased a whopping 7%, to $5.4 trillion from $5.05 trillion, in the second quarter. The number of homes with negative equity fell to 6.4 million and aggregate negative equity fell from $430 billion to $397 billion. The top five states with positive equity are Montana, Alaska, North Dakota, Texas, and Wyoming. Unsurprisingly, the top five states with negative equity are Nevada, Florida, Michigan, Arizona, and Georgia. Of all homeowners, 66.6% have at least 20% equity in their homes.
Impact on homebuilders
Homebuilders, like Lennar (LEN), D.R. Horton (DHI), PulteGroup (PHM), and Toll Brothers (TOL) compete with existing homes for sales. The large number of homes with negative equity has restricted the supply of existing homes, driving many move-up homebuyers to consider buying a new home as opposed to moving into an existing home. One potential issue for homebuilders is that new home equity will release pent-up supply, which siphons demand for new construction. Investors who are interested in trading the homebuilders as a sector should look at the S&P SPDR Homebuilder ETF (XHB).
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