By Michael Ardolino
The concept of pent-up demand is not restricted to buyers. Many local homeowners are ready to move up to a more desirable home or neighborhood, but when they crunch the numbers, they come up short. Often, this is because they are overlooking hidden wealth, and buying power, in the form of home equity. There is more to a home purchase than the traditional nest egg.
The basics: Let’s say a couple purchased a home with a 20 percent down payment, meaning they have a 20 percent equity stake. As they make mortgage payments, their principal decreases, and their equity — the portion of the home that they own — increases. With home price appreciation added, equity can add up much more quickly than expected.
Home price appreciation: Home prices locally have been steadily increasing at a modest rate for about five years, and the cumulative effect is now showing up in the form of increased home equity. For owners who have been in their homes for 15 to 20 years, the numbers can be surprising. According to Frank Nothaft, chief economist at Core Logic, “Homeowner equity increased by almost $871 billion over the last 12 months, the largest increase in more than three years. This increase is primarily a reflection of rising home prices, which drives up home values, leading to an increase in home equity positions and supporting consumer spending.”
The law of supply and demand: With low supply and high demand, prices will generally increase. For several years, both nationwide and locally, home inventory has been exceedingly low, while pent-up buyer demand has been very high. The resulting higher prices are boosting home equity.
Currently, our market is in effect being held hostage by low inventory. Multiple listing service stats show that in December 2017, inventory on Long Island was down by 7.1 percent over December 2016. Home equity is a solution. As more and more owners tap their equity and put their homes on the market, the constraints being placed on the market by low inventory will be lessened. As more homes are freed up for sale, more first-time buyers will enter the market, more existing owners will move up, more people will buy vacation homes and a healthy market cycle will be nourished.
Mortgage lending standards: According to research by Fannie Mae, “… if homeowners believe that large down payments are now required to purchase a home, then widespread, large underestimates of their home equity could be deterring them from applying for mortgages, selling their homes and buying different homes.”
The stringent lending standards of six to eight years ago have become much more consumer friendly. Loans with lower down payments are readily available to qualified buyers, and requirements regarding income, assets and employment are being relaxed.
If you are a potential seller who is sitting on significant home equity, it may be time to put it to work. If you are unsure as to the size of your equity position, consult a qualified real estate professional. Your equity is a valuable asset that can help you take advantage of our seller’s market while enjoying upward mobility.
Michael Ardolino is a founder and broker-owner of Realty Connect USA in Setauket.