Though the country’s economy as a whole took a hit in the second quarter of 2020, home values did not. Owners’ equity rose significantly in Q2.

A Look at the Numbers

As Q3 nears its end, we are seeing official data come in for Q2. The Federal Reserve recently released its second quarter Flow of Funds report and CoreLogic also released its Homeowner Equity Report for the quarter. The numbers are eye-opening. The aggregate value of all U.S. household mortgages rose by $80 billion (up to $10.6 trillion overall). Meanwhile, the total of households’ market values, which includes all owner-occupied real estate, mobile homes and vacant land, went up to $30.8 trillion. That represents an increase of $450 billion from Q1 to Q2. The end result was a rise in net equity (aggregate value minus aggregate mortgage debt) of $20.2 trillion. This is up by $370 billion compared to Q1.

Rising Home Prices

While there wasn’t a lot of new real estate sales activity happening between the months of April and May, the home values were rising. Demand grew while inventory shrunk even more, which kept driving up the prices. This sparked a huge spike in sales when markets opened back up in June. At the same time, many homeowners were taking advantage of low mortgage rates and seller’s market conditions to refinance their home loans. The total amount of household mortgage debt went up, but at a much lower rate than property values. Thus the big jump in owners’ equity in the second quarter.

Comparing Q2 of 2020 to Q2 of 2019, we saw a 4.3 percent gain in home prices year-over-year and an owners’ equity increase of 6.6 percent. The amount of negative equity mortgage properties also went down 15 percent from last year to this year, including a 5.4 percent decline in underwater homes from Q1 to Q2 of 2020.

What is Happening in Q3?

We can probably expect to see all these numbers continue to rise when the numbers come in for Q3. The real estate market has been red hot throughout much of the country as mortgage rates remain low and demand remains high. However, many economic experts predict that we will see a significant slow down over time because unemployment rates are more elevated in the wake of COVID-19.

With less people working and less business happening in many industrial sectors, the housing supply and demand gap will start to shrink. We’ll also start to see financial fallout as mortgage forbearance options and foreclosure/eviction moratoriums eventually come to an end. That will unfortunately leave many homeowners in a tough financial situation and force them to sell. We’re already seeing a lot of people in forbearance deciding to sell now while the market is hot and their equity is still strong.

HELOC Declines

One area where we saw a decline was the HELOC market. Home equity lines of credit actually went down in Q2 by a total of $83.8 billion ($61.2 billion of which was in equity loans provided by U.S. banks). People weren’t extracting their equity as much during the height of quarantine. Those who did were using the money primarily for home improvement and maintenance uses, which ultimately helps boost home values.

What Happens Next?

As time goes on and the economy continues to struggle, distressed-sale inventory will most likely go up. That will certainly start to level home values out. We don’t know exactly what the mortgage rates will do. Q4 will see one of the most volatile Presidential elections in history and possibly new spikes in coronavirus cases (on top of flu season). It will be interesting to see how the housing industry is affected by all these factors.

If history has taught us anything, it’s that the market always self corrects over time. When things are hot, the bubble will eventually burst. When things are down, the economy eventually recovers. The difference is the downward shifts are usually swift and sudden while the upward corrections are slow and steady.

If you are on the fence about buying or selling a home (or refinancing your mortgage), now is a great time to act while the market conditions are extremely favorable—especially to sellers and refinance borrowers. Contact Transparent Mortgage today at (858) 761-7795 or email me at jj@tspmortgage.com