Wealth Gains from Homeownership across Metro Areas in 2018

Wealth Gains from Homeownership across Metro Areas in 2018

Homeownership has been associated with positive social outcomes[1], and is also the largest source of wealth among homeowning households. In 2016, the median net worth among homeowners was $231,400, with housing wealth making up 85 percent of wealth (average net housing wealth was $197,500).[2]

Housing wealth contributes positively to the homeowner’s and children’s economic condition, because home equity can be tapped for expenditures such as investing in another property (which can generate rental income), home renovation (which further increases the home value), a child’s college education, emergency or major life events, or expenses in retirement.[3]

Housing wealth (or net worth or equity) is built up over time via the home price appreciation and the principal payments that the homeowner makes on the loan.[4]  The chart shows the change in housing wealth (equity) as of 2018 for a home buyer who purchased a typical single-family existing home in the United States 5, 10, 15, or 30 years ago. Over these holding periods, most of the wealth gains are from the appreciation in home values. For example, if one purchased a home five year ago (2013), a home buyer would have typically gained $79,488 in wealth (equity), of which $64,200, or 81 percent is from the home price appreciation ($197,400 in 2013 to $261,600 in 2018).  Homeowners who move typically do so in 10 years, so a homeowner who bought a home 10 years ago (2008) would have $91,081 in home equity gains as of 2018).[5] The longer the holding period, the larger the increase in wealth due to home price appreciation and the cumulative principal payments, which reduce the loan balance.

If you had purchased a home just five years ago in these metro areas, here are the typical gains in home equity that you have due to home price appreciation and the principal payments you’ve made[6]:

Metro areas with home equity gains of $200,000 or over for a home purchased 5 years ago:

  • San Jose-Sunnyvale-Sta. Clara: $620, 410
  • San Francisco-Oakland-Hayward: $393,561
  • Boulder, CO:  $264,395
  • Anaheim-Sta. Ana-Irvine, CA: $218,773
  • Los Angeles-Long Beach-Glendale, CA: $216,613
  • San Diego-Carlsbad, CA: $205,659

Metro areas with lowest equity gains (loss) for a home purchased 5 years ago:

  • Atlantic City-Hammonton, NJ: ($8,593)
  • New Jersey City-White Plains, NJ-NY: $3,336
  • Cumberland, MB-WV: $6,215
  • Trenton, NJ: $7943
  • Elmira, NY: $8,705

Use this data visualization to explore the typical increase in housing wealth across metro areas as of 2018 if you purchase a home 5, 10, 15, 30 years ago. These are typical gains and are illustrative of the magnitude of the wealth gains over time. Actual wealth gains will vary by property:


[1] Lawrence Yun and Nadia Evangelou, Social Benefits of Homeownership and Stable Housing, Realtor® University The Journal of the Center for Real Estate Studies; https://realtoru.edu/real-estate-studies/journal/

[2] Federal Reserve Board, 2016 Survey of Consumer Finances

[3] Brad Finkelstein, 7 reasons why consumers are tapping into home equity, The American Banker, June 26, 2018; https://www.americanbanker.com/7-reasons-why-homeowners-are-tapping-into-their-home-equity

[4] The price appreciation can be thought of as ‘capital gains’ while the principal payments can be thought of as a conversion from liquid asset (cash) to an illiquid asset (house).

[5] To be clear, these are changes in wealth or home equity between two time period or over n holding periods. If one wants the level of the home equity at a point in time, one has to add the down payment.

[6] These calculations are illustrative of the magnitude of the housing wealth gains; actual change in home equity will vary by home.

Online Home Value Estimates Are NOT Appraisals

Online Home Value Estimates Are NOT Appraisals

This blog was originally published on June 29, 2017.  It has since been updated to reflect new data.

Consumers who are seriously in the home buying and home selling market should be mindful of a variety of competing home price estimators. Solely relying on just one price estimate is likely to skew the views of what a particular property will actually transact for. When it comes to online home value estimates, however, the number one caveat for consumers is that these estimates are not a substitute for formal appraisals, comparative market analyses, and the in-depth expertise of real estate professionals. Nonetheless, it is important to know the different sources of Automated Valuation Models or AVMs and home value estimates available online, so that members can help clients and potential clients understand these estimates in their proper context.

Where are these home value estimates coming from? The prevalence of technology can give anyone more access to a broad spectrum of information on the internet. In real estate, access to property details and values is easier due partly to low-cost immense computing power. AVMs spit out a price for a property based on computer algorithms and calculations that take different sets of property data and look for patterns and relationships between property value and the input data. There are websites that will have a home value estimate available by just searching an address, while others may provide an estimate only upon request.

The most popular sources of home value estimates online are those that use AVMs. These estimates have varying levels of accuracies and may not take into account the unique qualities of a home, a neighborhood, and local markets. The main sources of AVM estimates are:

 

  • Realtors Property Resource® (RPR®): RPR® has two home value estimates, their AVM estimate and the Realtors Valuation Model® (RVM®) estimate. The difference between the two is that RVM® uses the same data as the AVM plus Multiple Listing Service (MLS) Data. Both AVM and RVM® show the accuracy level of the estimate by giving estimate ranges and confidence scores. This resource is available for REALTORS® only and allows a significant amount of expert customization, making it a useful tool for members, especially when working with well-researched clients.
  • REALTOR.com®: Realtor.com® uses tax assessment records, recent sale prices of comparable properties, and other factors to estimate home values. This estimate is free and publicly available.
  • Redfin: Redfin is a web-based real estate brokerage that gives the Redfin estimate for the property, which is based on market, neighborhood, and home-specific data, including MLS data on recently sold homes. Redfin cites that their estimates for properties currently on the market are more accurate than estimates for off-market properties. This estimate is free and publicly available.
  • HouseCanary: HouseCanary has two main services: valuations and forecasting. Their estimates use property level data from public records and the MLS. Their accuracy will vary across markets depending on the availability of data. This estimate is available with subscription to their services.
  • Homes.com: Homes.com’s estimate mainly uses public records. They test and benchmark the accuracy of their estimates. This estimate is free and publicly available.
  • Zillow: Zillow has the Zestimate, which is their home value estimate for properties and is computed using public and user-submitted data. Their estimates have different accuracy levels depending on the data of the property and location. This estimate is free and publicly available.
  • Eppraisal.com: Eppraisal.com uses property records, home sales data, and local market data for their estimates. Their accuracy depends on the accuracy and completeness of public data. This estimate is free and publicly available.
  • Trulia: The estimate from Trulia is likely to be very similar to Zillow’s zestimate since it is part of the same Zillow Group. Having a separate Trulia price estimate is more a marketing gimmick to give the impression to consumers that there is more competition, though it is just the same company trying to establish a greater market power, hence the ability to extract a higher fee from real estate professionals.

There are also websites that provide home value estimates by request only or estimates using user inputs: ForSaleByOwner.com, GuaranteedSale.com, HomeFacts.com, HomeLight.com, HomeValues.com, SmartAlto.com, ValuemyHouse.com, and ZipRealty.com. Some banking and financial institutions, such as Chase Bank, Bank of America, the Federal Housing Finance Agency, Fifth Third Bank, and PennyMac, also provide estimates to accompany their other financial services. Some real estate agents and brokerages also share their estimators through their websites. Again, it is important to know that these estimates have varying levels of accuracies. These sites may or may not use Automated Valuation Models, but can be another source of property and home value data that anyone can access.  Additionally, there are also data companies, such as Attom Data Solutions and CoreLogic, that market propriety AVMs.

As technologies advance and more data becomes available, the number of sites that provide home value estimates may grow. With the knowledge of where to find home value estimates online, it is important to note that these home value estimates are not interchangeable with formal appraisals, comparative market analyses, and they cannot be used as a basis for a loan. Most of these sites, if not all, reiterate the importance of consulting the expertise of real estate professionals to receive an in-depth and in-person analysis of the property and the local market.

 

Property Values By State from 2005-2017

Property Values By State from 2005-2017

Home price appreciation is an important topic in today’s economy. Using data from the American Community Survey (ACS), we can analyze the gains and losses of property values over time. I estimated the median property values by state in 2017 using the FHFA index and the median property values from the (ACS). I then calculated the growth rate from 2005 -2017. [1]

The states with the highest estimated median property values in 2017 are Hawaii ($637,892), District of Columbia ($605,756), California ($522,431), Massachusetts ($396,992), and Colorado ($342,967).

The states with the lowest estimated median property values in 2017 are Alabama ($141,714), Oklahoma ($137,387), Arkansas ($129,902), West Virginia ($122,791) and Mississippi ($118,019).

On a regional level, the estimated price growth appears to be the strongest in the South, West, and Midwest. Price growth is weakest in the Northeast states. Overall, all regions are displaying growth in property values with only a few states showing no growth or loses. Below is a breakdown of the Census four regions by state.

  • In the South, which typically leads all regions in sales, Texas led the region with 63 percent estimated price growth from 2005 to 2017. Although Florida experienced strong price growth since 2012, home prices have only increased by 14 percent since 2005 when house prices were still generally at peak levels.

  • In the West, the least affordable region[2], Montana led all states with 71 percent price growth from 2005 to 2017. Despite the strong price growth in California since 2012, prices have only increased by 9 percent since 2005. Nevada shows a negative 5 percent price change over this time.

 

  • In the Midwest where affordability is most favorable, North Dakota led all states with 111 percent price growth from 2005 to 2017. The increase is likely due to the boom in shale oil production up until 2014 when oil prices started collapsing. Illinois, while having the smallest growth in the region had an estimated 7 percent price growth over this time.

  • In the Northeast where price growth is typically slow, Pennsylvania lead the region with a 40 percent price growth from 2005 to 2017. Rhode Island was the only state to have a decline of negative 4 percent price change over this time.

Click on the data visualization below to view the historical prices by state from 2005-2017.

 


[1] I used the FHFA expanded data set, not seasonally adjusted data.

[2] Based on NAR housing affordability index

What Would an Increase in Mortgage Rates Mean for Homebuyers?

What Would an Increase in Mortgage Rates Mean for Homebuyers?

Experts forecast that the U.S. economy is in for yet another solid year of strength, albeit not at the same level as in 2017. NAR expects that the mortgage rate for a 30-year fixed mortgage will rise to 4.4 percent in 2018 from 3.9 percent in the last quarter of 2017[1], an increase of 50 basis points this year. However, how will this change affect the monthly mortgage payment of homebuyers?

It is estimated that, on a 30-year fixed-rate mortgage for $380,000, each half-point increase adds about $100 to the monthly payment. A homebuyer who wants to purchase a home with a value of $380,000 would pay $1,600 every month for the mortgage payment at a 3.9% mortgage rate[2]. Assuming the mortgage rate increases to 4.4%, the buyer would pay $1,700 per month in order to buy the same home. Among 177 metro areas, we see that 89% of these areas have a median home value lower than $380,000. This means that most homebuyers would see an increase of less than $100 in the monthly mortgage payment. While mortgage rates are still historically low, the expected increase in mortgage rates should not discourage people from buying a house. We calculated the increase in the monthly payment for 177 metro areas when the mortgage rate increases from 3.9% to 4.4%. As we move to metro areas with higher prices, the dollar amount that is added to the monthly payment rises as well. In Youngstown, OH and Decatur, IL, a typical homebuyer will need to pay an extra $23 every month for a home with a value of $89,000. However, in the San Jose, CA metro area where the median home price is $1.17 million, the monthly payment would increase by $305.
Metro areas with high-priced homes Depending on the type of homebuyer (first-time or repeat), homebuyers in metro areas with high priced homes may seek a lower priced home or stay longer in their existing home if they already own a house. First-time homebuyer First-time homebuyers may look for a lower priced home or a smaller home, one with fewer amenities or a home in a more affordable area with a longer commute. We calculated how much the maximum purchase value would need to be reduced in order to retain the same monthly payment with a higher mortgage rate. For a 50 basis points increase in the mortgage rate, homebuyers need to purchase a home that is about 6% lower in price if they want the same monthly payment as they would pay at a lower rate. For instance, in San Francisco, CA metro area, the median home value is $900,000. The monthly payment for a typical homebuyer is $3,820 at a 3.9% mortgage rate and a 10% down payment. However, at a 4.4% mortgage rate, the typical homebuyer needs to search for homes with a maximum purchase price of $847,700 to continue paying $3,820. Thus, the maximum purchase price is cut by $52,300. Repeat homebuyer Rising mortgage rate may push existing owners in these metro areas to stay in their homes longer. Although mortgage rates are still relatively low, some owners may not be able to get the same favorable terms compared to their existing mortgage, especially owners who bought their home in 2012 when mortgage rates reached their lowest level. In the meantime, these owners, who may stay longer in their home, will likely build more equity while home prices continue to grow as a result of the limited inventory. A typical homeowner in San Jose, CA metro area has accumulated $493,000 in equity as a result of the price appreciation in the last five years while the price of his home increased by $165,000 within the last year. All in all, we see that many homebuyers in most metro areas will not be significantly affected by a higher rate of 4.4%. The visualization below allows you to see how much the monthly payment changes in 177 metro areas when the mortgage rate increases to 4.4% from 3.9%.
DATA BY METRO AREA
 
[1] Based on the average interest rate on a 30-year conventional home loan that Freddie Mac published for Q4 2017.
[2] Assuming 10% down payment.
In Which States Did Properties Sell Most Quickly in December 2017?

In Which States Did Properties Sell Most Quickly in December 2017?

Amid strong demand and tight supply, REALTORS® reported that properties that sold in December 2017 were typically on the market for 40 days in November 2017, down from 52 days compared to the same month last year, according to the  December 2017 REALTORS® Confidence Index Survey.[1] The median days on market have been broadly on a downtrend since 2011 when the properties typically were on the market for three months from May 2011, when this question was first asked in the RCI Survey, through March 2012. For the full year of 2017, the median days on market was 35 days (43 days in 2016). During October–December 2017, properties sold in less than 31 days in 15 states: Washington, Oregon, California, Nevada, Utah, Colorado, North Dakota, South Dakota, Nebraska, Kansas, Minnesota, Indiana, Kentucky, Rhode Island, and Massachusetts. Properties also sold in less than 31 days in the District of Columbia.

rci_020818

Amid fewer listings for sale in many areas, properties continued to sell at a faster pace in many metro areas. Of the 500 metro areas tracked by Realtor.com, days on market have dropped in 388 areas, 78 percent of the areas. The metro areas where properties were listed for the shortest time in December 2017 compared to one year ago are San Jose-Sunnyvale-Sta. Clara, CA (37 days), San Francisco-Oakland-Hayward, CA (45 days), Vallejo-Fairfield, CA (45 days), Nashville-Davidson-Murfreesboro-Franklin, TN (46 days), Ogden-Clearfield, UT (47 days), Provo-Orem, UT (48 days), Stockton-Lodi, CA (48 days), and San Diego-Carlsbad, CA (49 days). Use the data visualization below to check out the data across metro areas.

[1] In generating the median days on market at the state level, NAR uses data for the last three surveys to have close to 30 observations. Small states such as AK, ND, SD, MT, VT, WY, WV, DE, and D.C., may have fewer than 30 observations.
 

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