A house for sale in Scituate, Massachusetts.
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The meteoric rise in home values during the Covid-19 pandemic has given American homeowners record amounts of real estate wealth. What they choose to do with it could affect the broader economy.
Annual home price gains averaged 15% in 2021, compared to 6% in 2020, according to CoreLogic. Strong demand due to the pandemic, record supply and record mortgage rates combined to create these sizable gains. Bidding wars are now the norm, and desperate buyers compete with investors who want to cash in on the booming market. The upward trend continues, even though winter is historically the quietest season for housing.
“While we expect buyers this year to eventually see some relief from the frenzy of 2021, homebuyers continue to face difficult conditions in early 2022,” said Danielle Hale, economist Chief for Realtor.com. “In fact, last week’s house prices and market trends suggest competition has intensified.”
While there were relatively few home sellers in 2021, for those who listed their homes, the returns were worth it. The profit on a typical home sale last year was just over $94,000 according to ATTOM, a national property database. This represents an increase of 45% over 2020 earnings and 71% over pre-pandemic earnings. And the vast majority of local housing markets have participated in this growth.
“Households that have escaped pandemic job losses have plunged into the market, largely in response to the crisis,” said Todd Teta, Chief Product Officer at ATTOM. “There are undoubtedly early signs that the surge may slow this year. But 2021 will go down as one of the best years for sellers and one of the toughest for buyers.”
This was the highest level of profit since 2008 which was the last housing boom and that boom was built on bad mortgages and landlords with little or no equity. This is not the case now.
Even owners who did not list their properties for sale were gaining equity. About 42% of homeowners were considered equity-rich at the end of last year, meaning their mortgages were half or less than half the value of their home. This wealth is well above the 30% share of stock-rich homeowners at the end of 2020. Nine of the ten most stock-rich states were in the West, including Idaho, Utah, Washington and the West. ‘Arizona.
The least housing-rich states were primarily in the Midwest and South, such as Illinois, Louisiana, and Mississippi.
The amount of usable equity (equity above the 20% typically required by lenders to secure a mortgage) rose by $2.6 trillion last year to a record total of $9.9 trillion, according to an exclusive look at Black Knight’s Mortgage Monitor. That’s a jump of 35% in just one year. The average owner now has $185,000 in workable equity.
So what does this mean for the overall economy? Lots of potential purchasing power, if consumers decide to use all that wealth. According to the US Bureau of Economic Analysis, the personal savings rate skyrocketed during the pandemic and is only now beginning to return to pre-pandemic levels.
“The shift to an equity-centric market is already underway, and in the third quarter of last year, borrowers were taking more money out of their homes than they had in 14 years,” he said. Andy Walden, vice president of research and business research. strategy with Black Knight.
With inflation at its highest level in 40 years, this additional purchasing power could continue to drive up demand and prices.
The only thing that might prevent some homeowners from tapping into all that wealth, outside of selling their home, is rising mortgage rates. They may not want to do a cash-out refinance because they will likely have to pay a higher rate. A home equity line of credit is a possibility, but interest rates on these are also rising.