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3 Ways Home Equity Can Have a Major Impact on Your Life

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There have been a lot of headlines reporting on how homeowner equity (the difference between the current market value of your home and the amount you owe on your mortgage) has dramatically increased over the past few years. CoreLogic indicated that equity increased for the average homeowner by $17,000 in the last year alone. ATTOM Data Solutions, in their latest U.S. Home Equity Report, revealed that 30.2% of the 59 million mortgaged homes in the United States have at least 50% equity. That doesn’t even include the 38% of homes that are owned free and clear, meaning they don’t have a mortgage at all.

How can equity help a household?

Having equity in your home can dramatically impact your life. Equity is like a savings account you can tap into when you need cash. Like any other savings, you should be sensible in how you use it, though. Here are three good reasons to consider using your equity.

1. You’re experiencing financial hardship (job loss, medical expenses, etc.)

Equity gives you options during difficult financial times. With equity, you could refinance your house to get cash which may ease the burden. It also puts you in a better position to talk to the bank about restructuring your home loan until you can get back on your feet.

Today, there are 2.7 million Americans who are currently in a forbearance program because of the pandemic. Ninety percent of those in the program have at least 10% equity. That puts them in a better position to get a loan modification instead of facing foreclosure because many banks will see the equity as a form of collateral in a new deal. If you’re in this position, even if you can’t get a modification, the equity allows you the option to sell your house and walk away with your equity instead of losing the house and your investment in it.

2. You need money to start a new business

We’ve all heard the stories about how many great American companies started in the founder’s garage (i.e., Disney, Hewlett Packard, Apple, Yankee Candle, Keeping Current Matters). What we might not realize, however, is the garage (along with the rest of the home) supplied the start-up money for many of these companies in the form of a refinance.

If you’re passionate about an idea you have for a new product or service, the equity in your home may enable you to make that dream a reality.

3. You want to invest in a loved one’s future

It’s been a long-standing tradition in this country for many households to help pay college expenses for their children. Some have tapped into the equity in their homes to do that.

Additionally, George Ratiu, Senior Economist for realtor.com, notes:

52% of Americans who bought their first home in 2020 said they got help with their down payment from friends or family. The number one lender? Their parents.

It’s safe to assume a percentage of that down payment money likely came from home equity.

Bottom Line

Savings in any form is a good thing. The forced savings you can earn from making a mortgage payment enables you to build wealth through home equity. That equity can come in handy in both good and more challenging times.

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Distressed Properties

Why a Wave of Foreclosures Is Not on the Way

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With forbearance plans coming to an end, many are concerned the housing market will experience a wave of foreclosures similar to what happened after the housing bubble 15 years ago. Here are a few reasons why that won’t happen.

There are fewer homeowners in trouble this time

After the last housing crash, about 9.3 million households lost their homes to a foreclosure, short sale, or because they simply gave it back to the bank.

As stay-at-home orders were issued early last year, the fear was the pandemic would impact the housing industry in a similar way. Many projected up to 30% of all mortgage holders would enter the forbearance program. In reality, only 8.5% actually did, and that number is now down to 2.2%.

As of last Friday, the total number of mortgages still in forbearance stood at 1,221,000. That’s far fewer than the 9.3 million households that lost their homes just over a decade ago.

Most of the mortgages in forbearance have enough equity to sell their homes

Due to rapidly rising home prices over the last two years, of the 1.22 million homeowners currently in forbearance, 93% have at least 10% equity in their homes. This 10% equity is important because it enables homeowners to sell their homes and pay the related expenses instead of facing the hit on their credit that a foreclosure or short sale would create.

The remaining 7% might not have the option to sell, but if the entire 7% of those 1.22 million homes went into foreclosure, that would total about 85,400 mortgages. To give that number context, here are the annual foreclosure numbers for the three years leading up to the pandemic:

  • 2017: 314,220
  • 2018: 279,040
  • 2019: 277,520

The probable number of foreclosures coming out of the forbearance program is nowhere near the number of foreclosures that impacted the housing crash 15 years ago. It’s actually less than one-third of any of the three years prior to the pandemic.

The current market can absorb listings coming to the market

When foreclosures hit the market back in 2008, there was an oversupply of houses for sale. It’s exactly the opposite today. In 2008, there was over a nine-month supply of listings on the market. Today, that number is less than a three-month supply. Here’s a graph showing the difference between the two markets.Why a Wave of Foreclosures Is Not on the Way | Simplifying The Market

Bottom Line

The data indicates why Ivy Zelman, founder of the major housing market analytical firm Zelman and Associates, was on point when she stated:

“The likelihood of us having a foreclosure crisis again is about zero percent.”

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Distressed Properties

Understand Your Options To Avoid Foreclosure

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Even though experts agree there’s no chance of a large-scale foreclosure crisis, there are a number of homeowners who may be coming face-to-face with foreclosure as a possibility. And while the overall percentage of homeowners at risk is decreasing with time (see graph below), that’s little comfort to those individuals who are facing challenges today.Understand Your Options To Avoid Foreclosure | Simplifying The MarketIf you haven’t taken advantage of the forbearance period, it may be time to research and understand your options. It starts with knowing what foreclosure is. Investopedia defines it like this:

Foreclosure is the legal process by which a lender attempts to recover the amount owed on a defaulted loan by taking ownership of and selling the mortgaged property. Typically, default is triggered when a borrower misses a specific number of monthly payments . . .” 

The good news is, there are alternatives available to help you avoid having to go through the foreclosure process, including:

  • Reinstatement
  • Loan modification
  • Deed-in-lieu of foreclosure
  • Short sale

But before you go down any of those paths, it’s worth seeing if you have enough equity in your home to sell it and protect your investment.

Understand Your Options: Sell Your House

Equity is the difference between what you owe on the home and its market value based on factors like price appreciation.

In today’s real estate market, many homeowners have far more equity in their homes than they realize. Over the last year, buyer demand has been high, but housing supply has been low. That’s led to a substantial increase in home values. When prices rise, so does the amount of equity you have in your house.

According to CoreLogic, on average, homeowners gained $33,400 in equity over the last 12 months, and the average equity on mortgaged homes is now $216,000 (see map below):Understand Your Options To Avoid Foreclosure | Simplifying The MarketSo, what does that mean for you? Over the past year, chances are your home’s value and therefore your equity has risen dramatically. If you’ve been in your home for a while, the mortgage payments you’ve made over time chipped away at the balance of your loan. If your home’s current value is higher than what you still owe on your loan, you may be able to use that increase to your advantage.

Frank Martell, President and CEO of CoreLogic, elaborates on how equity can help:

Homeowner equity has more than doubled over the past decade and become a crucial buffer for many weathering the challenges of the pandemic. These gains have become an important financial tool and boosted consumer confidence in the U.S. housing market.”

Don’t Go at It Alone – Lean on Experts for Advice

To find out what your house is worth in today’s market, work with a local real estate professional. We’ll be able to give you an estimate of what your house could sell for based on recent sales of similar homes in your area. Since home prices are still appreciating, you may be able to sell your house to avoid foreclosure.

If you find out that you have to pursue other options, your agent can help with that too. We’ll be able to connect you with other professionals in the industry, like housing counselors who can look into your unique situation and offer advice on next steps if selling isn’t the best alternative.

Bottom Line

If you’re a homeowner facing hardship, let’s connect to explore your options and see if you can sell your house to avoid foreclosure.

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Distressed Properties

4 Reasons Why the End of Forbearance Will Not Lead to a Wave of Foreclosures

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With forbearance plans about to come to an end, many are concerned the housing market will experience a wave of foreclosures like what happened after the housing bubble 15 years ago. Here are four reasons why that won’t happen.

1. There are fewer homeowners in trouble this time

After the last housing crash, about 9.3 million households lost their home to a foreclosure, short sale, or because they simply gave it back to the bank.

As stay-at-home orders were issued early last year, the overwhelming fear was the pandemic would decimate the housing industry in a similar way. Many experts projected 30% of all mortgage holders would enter the forbearance program. Only 8.5% actually did, and that number is now down to 3.5%.

As of last Friday, the total number of mortgages still in forbearance stood at  1,863,000. That’s definitely a large number, but nowhere near 9.3 million.

2. Most of the 1.86M in forbearance have enough equity to sell their home

Of the 1.86 million homeowners currently in forbearance, 87% have at least 10% equity in their homes. The 10% equity number is important because it enables homeowners to sell their houses and pay the related expenses instead of facing the hit on their credit that a foreclosure or short sale would create.

The remaining 13% might not all have the option to sell, so if the entire 13% of the 1.86M homes went into foreclosure, that would total 241,800 mortgages. To give that number context, here are the annual foreclosure numbers of the three years leading up to the pandemic:

  • 2017: 314,220
  • 2018: 279,040
  • 2019: 277,520

The probable number of foreclosures coming out of the forbearance program is nowhere near the number of foreclosures coming out of the housing crash 15 years ago. The number does, however, draw a similar comparison to the three years prior to the pandemic.

3. The current market can absorb any listings coming to the market

When foreclosures hit the market in 2008, there was an excess supply of homes for sale. The situation is exactly the opposite today. In 2008, there was a 9-month supply of listings for sale. Today, that number stands at less than 3 months of inventory on the market.

As Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), explains when addressing potential foreclosures emerging from the forbearance program:

“Any foreclosure increases will likely be quickly absorbed by the market. It will not lead to any price declines.”

4. Those in power will do whatever is necessary to prevent a wave of foreclosures

Just last Friday, the White House released a fact sheet explaining how homeowners with government-backed mortgages will be given further options to enable them to keep their homes when exiting forbearance. Here are two examples mentioned in the release:

  • “For homeowners who can resume their pre-pandemic monthly mortgage payment and where agencies have the authority, agencies will continue requiring mortgage servicers to offer options that allow borrowers to move missed payments to the end of the mortgage at no additional cost to the borrower.”
  • “The new steps the Department of Housing and Urban Development (HUD), Department of Agriculture (USDA), and Department of Veterans Affairs (VA) are announcing will aim to provide homeowners with a roughly 25% reduction in borrowers’ monthly principal and interest (P&I) payments to ensure they can afford to remain in their homes and build equity long-term. This brings options for homeowners with mortgages backed by HUD, USDA, and VA closer in alignment with options for homeowners with mortgages backed by Fannie Mae and Freddie Mac.”

When evaluating the four reasons above, it’s clear there won’t be a flood of foreclosures coming to the market as the forbearance program winds down.

Bottom Line

As Ivy Zelman, founder of the major housing market analytical firm Zelman & Associates, notes:

“The likelihood of us having a foreclosure crisis again is about zero percent.”

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The information contained, and the opinions expressed, in these article are not intended to be construed as investment advice. Let's Talk Real Estate and Keeping Current Matters, Inc. do not guarantee or warrant the accuracy or completeness of the information or opinions contained herein. Nothing herein should be construed as investment advice. You should always conduct your own research and due diligence and obtain professional advice before making any investment decision. Let's Talk Real Estate and Keeping Current Matters, Inc. will not be liable for any loss or damage caused by your reliance on the information or opinions contained herein.