Positive Equity Isn't Always a Positive Thing

By Kristi Waterworth

all about your home equity

I don’t know about you, but I spend a not insignificant amount of time tracking the value of the house I own back home. My mom lives there, I’m not going to sell it any time soon, but it’s nice to know that I could tap the equity if she needed a roof or something.

That being said, you can understand why the following headline caught my eye big time: “Average homeowner gained $16,000 in home equity in 1 year.” That’s not a clickbait headline, it’s from Housing Wire, a publication of note for the mortgage industry. Obviously, this is incredible news for people who own houses already, not such great news for people looking to buy a house right now.

Oh, But It Gets Better

If you’ve read many of these columns, you know that I’m a veteran of the real estate crash. Or, maybe I contributed to it… it all kind of depends on your point of view, I guess. Anyway, as I read further into this article, I learned that negative equity (also known as being “underwater”) fell another 9%, leaving only 4.3% of mortgaged homes underwater nationally. That is amazing news. It truly is. Housing Wire goes on to remind us that in Q4 2009, 26 percent of homes were underwater.

It’s been an incredibly weird year for real estate. The Fed keeps raising their rate, albeit slowly, with banks following along with higher interest rates for home mortgages. That’s all fine and good as a way to keep the economy stable, except that there aren’t nearly enough houses to buy, so squeezing additional borrowers out of the market makes almost no sense. Whatever logic they’re using is completely lost on me.

Home Equity Was Bound to Happen

Contractors can’t build fast enough because of a lack of construction workers, existing homes aren’t going up on the market fast enough, but consumer confidence is way up -- it was bound to push home values. In states like Texas, the average house gained $10,610 in value this year, but some states like Idaho saw jumps of $21,483 in equity.

Only Connecticut, Louisiana, and North Dakota lost value. And a pity for them because they are lovely states. But it can’t be helped, the data is the data.

What Will You Do With Your $16,000?

There are some people who will, upon hearing that they may have gained a lot of equity this year, run to the nearest bank to cash it out. Maybe they’ve had a dream project on hold for years, just waiting for a big enough windfall to get it moving, maybe they have a hospital bill that really needs to be paid, or maybe they’re just impetuous and plan to go on a cruise to the Bahamas.

I hear the Bahamas are super nice this time of year and the water’s so blue and clear that you can see right to the bottom like in a swimming pool. Take a snorkel. Trust me on this.

This is the Serious Part

Before you do anything about that $16k, I want to remind you about the Tax Cuts and Jobs Act of 2017, as well as our escalating trade war with China.

First, the Tax Cuts and Jobs Act of 2017. If you use that money for anything other than remodeling your home, even paying medical bills, the interest is not deductible. And it won’t be until 2026, minimum.

And then there’s that pesky trade war.

I’m sorry I had to bring it up, but really, I have your best interests at heart. Remember, I was a Realtor as the market got so hot in the mid 2000’s that it overheated and caused catastrophic meltdown across the sector. Mortgage lenders, insurance companies and even builders and other home pros were hit by the fallout. Realtors were decimated. No one in any industry near ours was safe.

Now, in 2018, about 11 years after the market collapse reached me in the sleepy Missouri Ozarks, we have a very similar situation brewing, even though the source is different.

Home equity is exploding. There are too many buyers and not enough houses. Money is falling from the sky. And we’re just going to keep pretending that the cost of living isn’t going to skyrocket at any moment (according to the BBC, we’re already feeling the strain; it certainly seems that way from where I am).

It isn’t market derivatives that threaten the health of the market today, it’s going to be the price of absolutely everything. When was the last time you bought something that wasn’t, at least in part, from China? Heck, when was the last time you even saw a product stamped with “Made in the USA?”

Experts currently figure that some 11 million workers employed by American companies globally will lose their jobs. That might not sound like a lot, but it’s plenty to start making waves. When the general public figures this out, I fear that the housing supply will dry up even further, meaning you’re going to gain even MORE equity that you absolutely need to not touch, and then at some point no one will be able to buy a house to save their lives so your equity will be totally useless.

Hope for the Best, but Brace for the Worst

This week, as I ponder what I’m going to do with that $16k (my mom’s birthday is on the 21st, so maybe I could send her some new siding?), I am also pondering where the market is headed.

Here in the Dallas-Fort Worth Metroplex, housing isn’t cheap. The house we’re looking for here is almost five times the cost of my mom’s house and at least three times the cost of an average home in the Ozarks. That’s not chump change, not by a long shot. So as prices rise and rise, I’m also worrying for myself. Next August we intend to start shopping seriously, but with both rates and prices headed up, we may be priced out of the market.

And so might you.

It’s All Connected

We all need a stable housing market where purchasing a decent home is actually an attainable goal. We need global trade. We need an economy that doesn’t feel like it’s about to combust at any moment. All of this stuff is tied together, don’t ever let anybody tell you it isn’t.

This was going to be such a positive column, too. But I guess the truth is that having positive equity isn’t always a positive thing. Take great care with how you tap that equity in the next few years and what you use it for.

Your equity can be a piggy bank, just waiting for the global markets to calm down. You don’t have to spend it all in one place. Even if that place is the Bahamas… where the water is so crystal clear, you can watch the little fish swimming around your feet.