Home Equity Reaches A New Peak

According to the Federal Reserve Board’s fourth quarter of 2016 release of its Financial Accounts of the United States report, household holdings of real estate, measured on a not seasonally adjusted basis, totaled $23.102 trillion in the fourth quarter of 2016, $1.535 trillion higher than its level in the fourth quarter of 2015.

Home mortgage debt outstanding, $9.754 trillion in the fourth quarter of 2016, rose by $218 billion over the same four-quarter period. As the change in the total value of household-held real estate exceeded growth in the aggregate amount of mortgage debt outstanding, total home equity held by households grew.

Over the year, total home equity held by households rose by $1.317 trillion, 10.9 percent, to $13.349 trillion. Households’ home equity is now 57.8 percent of household real estate.

The current level of owners’ equity in real estate held on households’ balance sheets, $13.35 trillion, now exceeds its previous peak level of $13.27 trillion that was accumulated by 2005 (on a nominal basis). As a result of the housing downturn, the total amount of housing equity fell by 54 percent from its pre-recession peak to a low $6.16 trillion in 2010. The total amount of housing equity in 2010 was close to its level in 1999, $6.21 trillion. In the years following 2010, housing equity began to recover, expanding by 117 percent between 2010 and 2016.

Although housing equity in aggregate has eclipsed its pre-recession peak level, the distribution of holdings among those with a mortgage has changed. According to a previous post, tight credit standards on purchase mortgages partly reflect the historically high credit score needed to obtain a mortgage and purchase a home. Analysis by researchers at the Federal Reserve Bank of New York (FRB NY) demonstrates how this restriction correlates with the changing composition of housing equity. They find that “for homeowners who have debt…equity has shifted more substantially over time.”

Prior to discussing their results on the shifts in housing equity held by mortgage borrowers, the FRB NY researchers point out that homeowners with mortgage debt account for one portion of homeownership and housing equity, but another, smaller component of housing equity resides with those households that own their home free and clear. Using data from the American Community Survey, the FRB NY authors find that “about one-third of owner-occupied homes corresponding to 44 percent of total net housing wealth is held free and clear.”

For homeowners that also have a mortgage, those borrowers with a current FICO score below 700 were the largest class in 2006 and borrowers with a score above 780 accounted for the smallest proportion of borrowers. However, by 2016 the composition switched. Borrowers with a score below 700 are the smallest share of borrowers while those with a score exceeding 780 are now the largest.

According to the table above, copied directly from their blog post, the correlation with housing equity is not reflected in a change in ranking, but rather in the change in the share of equity held by each category. For homeowners who have mortgage debt, those with a score above 780 accounted for the largest portion of housing equity held by mortgage borrowers in 2006 and that did not change in 2016. Instead, as with its proportion of borrowers, its share grew, largely at the expense of the total housing equity held by borrowers with a score below a 700. By the first quarter of 2016, borrowers with a score above 780 hold half of the housing equity that has accrued to borrowers with a mortgage while approximately $5 out of every $6 in the housing equity associated with mortgage borrowers is held by those borrowers with a 700 and above.

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