During the last several years, most areas have experienced strong price appreciation which has increased home equity levels dramatically. As the number of “cash-out” refinances begins to approach numbers last seen before the crash, some experts are afraid that homeowners may be repeating last decade’s mistake.
However, when you look closer at the numbers you’ll find that homeowners are being much more responsible with their equity compared to 2008.
When home values began to surge last decade, homeowners started using their home equity as personal ATM’s. Homeowners would refinance their homes and convert their equity into instant cash by way of “cash-out” refinances. Because homes were going up in value so rapidly, many homeowners tapped into their equity multiple times.
This practice left many homeowners with little-or-no equity in their home. As home prices started to fall, many homeowners found their homes in a negative equity situation (where the mortgage amount was greater than the value of the house). When some of these homeowners saw that there was no equity left in their homes, they just stopped paying their mortgages altogether.
Banks eventually foreclosed on those homes and the foreclosures drove prices down even further and put more homes into a negative equity situation. This vicious cycle continued, leading to the worst housing crash in decades.
Once again, homeowner are seeing their home equity grow. Right now, over 48% of all single family homes in the country have over 50% equity. This is causing some families to tap into their equity. However, this time around, homeowners are not making the same irresponsible decisions. According to the latest information from Freddie Mac, the total home equity being “cashed out” is only a fraction of what it was leading up to the crash. Here are the numbers:
So as you can see, the recklessness that accompanied the build-up in home equity prior to the last crash in 2008, does not exist today. This makes the real estate market much more secure that the one we had heading into 2008.
Now, if you would like to get an idea of how much equity you have in your home, feel free to reach out to me.