Esteemed real estate columnist Ken Harney announced the biggest real estate news in 2013 was that homeowners’ net equity increased by $2.2 trillion year-over-year.
Over 3 million homes have returned to positive equity since 2013, according to CoreLogic. Harney calls out California’s housing recovery as particularly stunning: the 2012-2013 asset inflation pushed California’s negative equity rate to 13%. Compare this to neighboring sand state Nevada, where negative equity is still 30%.
Harney seems exceedingly optimistic about the nation’s home equity gains. Here’s his litany of positive home equity virtues:
- more homeowners can sell without bringing cash to closing;
- homeowners can borrow against their equity; and
- positive equity boosts confidence and encourages consumer spending.
All totally valid points. So far, his reasoning is sound. However, at the end of his article, Harney makes one surprising remark:
“But another bust is nowhere in sight, thanks to tougher underwriting and regulatory oversight. So whether you’re one of the recent arrivals to positive equity status, or you’ve enjoyed it all along, the new year looks encouraging.”
The problem here is that he assumes the present equity boom in California and elsewhere is sustainable simply because it is not a debt bubble. There are other types of bubbles, including the cash-driven investor bubble that has temporarily buoyed all ships.
California real estate prices are going to fall in the coming year or two for several reasons. A lack of buyer purchasing power (BPP) is the single most influential factor. Over the course of 2013 the 30-year fixed rate mortgage (FRM) increased over a full percentage point. Wages are stagnant, meaning end users are simply not able to pay currently inflated prices.
Real estate, of course, is always local, and the amount of price depreciation that occurs depends on the forces affecting your local market. However, it is safe to say that no one ought to be borrowing against their newfound equity at this precarious moment in the real estate market recovery.
For lack of a better phrase, we’ve declared 2014 a year of wait and see. That means we’ll have to wait and see if home equity continues to surge in 2014.