More American homeowners will be able to use their properties as cash machines again after real estate equity jumped last year by the most in 65 years.
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Property owners recaptured US$1.6 trillion as home values climbed to the highest levels since 2007. The amount by which the value of the houses exceeds their underlying mortgages rose to US$8.2 trillion last year, a gain of 25%, according to Federal Reserve data.
Tuesday, the S&P/Case Shiller composite index showed U.S. single-family home prices rose in January, starting the year with the biggest annual increase in six-and-a-half years in a fresh sign the housing market recovery remains on track.
The index of 20 metropolitan areas gained 1% month-on-month in January on a seasonally adjusted basis, topping expectations for 0.9%. Prices have been gaining since last February.
On a non-seasonally adjusted basis, prices rose 0.1%.
Prices in the 20 cities climbed 8.1% year-over-year, also beating expectations for 7.9%. It was the biggest yearly increase since June 2006, when housing prices were on their way down as the market was starting to collapse.
An expanding group of homeowners is able to get cash from their properties as banks show more willingness to make home equity loans with the market?s recovery. Originations for so-called junior, or second, mortgages should rise 10% to almost US$83 billion this year, from about US$75 billion in 2012, said Shaun Richardson, a vice president at Icon Advisory Group, a mortgage analytics firm in Greensboro, North Carolina. About 6% of lenders eased equity-mortgage standards at the end of 2012, the most in 18 months, according to the Fed.
?Lenders are starting to come back into the marketplace,? said Greg McBride, a senior financial analyst at Bankrate Inc. ?We?re not going back to the wild, Wild West we saw during the real estate boom, but we are going to see more people spending their equity.?
Americans went on a spending spree in the five years before the 2006 peak of the real estate market, tapping about US$800 billion of their rising equity to spend on everything from cars and televisions to debt consolidation and college tuition.
Declared Worthless
At the beginning of the financial crisis in 2008, close to US$1 trillion of the loans were outstanding at U.S. banks and credit unions, an all-time high, according to the Fed. In the housing crash that followed, banks wrote off, or declared worthless, about US$251 billion of home equity loans, according to the Federal Deposit Insurance Corp.
The year-old real estate recovery is helping to ease defaults. The volume of equity loans 90 days or more overdue dropped 25% in the fourth quarter to US$3.2 billion from the prior period, according to the FDIC. As a result, banks are beginning to view equity lending as a potential source of income, rather than losses, said Stuart Feldstein, president of SMR Research Corp., a consumer-lending research firm in Hackettstown, New Jersey.
?This could be the year banks see the home-equity business return to black ink, as long as defaults continue to decline,? Feldstein said.
Home-equity mortgages held by banks probably will yield a 0.2% return on assets this year, which is the after-tax income on outstanding loans, Feldstein said. Improvements in home prices and credit quality over the next two years should put profit back to the pre-bust level of 1% to 1.5% return on assets, he said.
Banks Retain
JPMorgan Chase & Co., Bank of America Corp., Wells Fargo & Co. and Citigroup Inc., the top four U.S. banks by assets, hold US$319.6 billion of the loans, about half of the outstanding balance of US$652.6 billion, according to the Federal Deposit Insurance Corp. Bank of America has the most home-equity loans, at US$102.6 billion.
Unlike first-lien mortgages, banks retain most of their equity originations on their books. Only about 2% are securitized on the secondary market, said Feldstein. There are two kinds of home-equity mortgages: lines of credit, known as Helocs, and closed-end loans borrowed in lump sums.
Helocs are adjustable loans tied to the prime rate, the interest charged by banks to their most creditworthy customers, with the addition of a margin pre-determined by the lender. The national average prime rate has been 3.25% since the end of 2008, as measured by Bloomberg.
Average Rates
The average rate for a Heloc last week was 5.11%, down from 5.22% a year ago, according to Bankrate.com, an interest-rate aggregator in North Palm Beach, Florida. That puts the average margin at close to 2%.
Closed-end loans, sometimes called He-loans, are usually fixed-rate junior mortgages. The average U.S. rate for a closed- end loan was 6.13% last week, according to Bankrate. A year ago, the rate was 6.39%. Lenders usually require borrowers to retain at least 20% equity, meaning the junior mortgages added to the primary loan can?t exceed 80% of a home?s value, Bankrate?s McBride said.
About US$6.5 trillion of residential real estate value evaporated after a wave of mortgage defaults sparked the 2008 financial crisis. The median U.S. home price hit bottom in 2012 after a 33% drop, as measured by the National Association of Realtors. In February, the median price was up 12% from a year earlier, the trade group said last week.
Take Risks
?Owners who have been sitting in their homes and watching their equity go up will be more likely to borrow and to spend, and more likely to take risks like looking for another house,? said Craig Focardi, senior research director at CEB TowerGroup. ?Having home equity is a financial cushion to the average consumer?s personal balance sheet.?
A reviving real estate market added to gross domestic product last year for the first time since 2005, according to the Bureau of Economic Analysis in Washington. The economy probably will grow at a 1.9% pace in 2013, the fourth year after the end of the recession, according to the median forecast of 83 economists surveyed by Bloomberg.
Household Spending
Still, not everyone is spending. The amount households have in bank deposits, savings bonds, fixed-income mutual-funds and municipal securities increased US$500 billion last year, equaling the most since 2007, according to FTN Financial, based on Fed data, while net household debt increased US$10 billion, the least since 2005.
?You might qualify for a home equity loan, but still have concerns about the economy or job security,? said Icon Advisory?s Richardson. ?Or, you might be in that large group of people who need prices to come back a lot more before they qualify.?
Fed policy makers for four years have driven down fixed home-loan rates by purchasing mortgage-backed bonds to stimulate demand. Last week, the central bank said it would continue to buy securities at a pace of US$85 billion a month in their third round of so-called quantitative easing.
At the end of 2012, the average rate for a 30-year fixed primary mortgage fell to an all-time low of 3.3%, according to home-loan financier Freddie Mac in McLean, Virginia. Falling rates helped to boost home sales to 4.7 million last year, a gain of 8.4% from 2011.
?When we see some more history of home-price stability and improving employment data, there will be more people thinking about using their equity,? said Focardi, of CEB TowerGroup. ?Having equity gives a boost to confidence.?
With files from Reuters
Bloomberg.com
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