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Despite equity boom, many homes remain seriously underwater

Despite equity boom, many homes remain seriously underwater
Arizona experienced some of the steepest drops in home prices during the recession but now has a serious negative equity rate of 18%, just slightly above the national average of 15%. Above, a Mesa, Ariz., development. (Justin Sullivan / Getty Images)

The equity boom, which has added an estimated $1.6 trillion to the personal net wealth of American homeowners in the last year, has slowed dramatically. It's not over by any means. It has just lost some of its previous pep.

In the latest quarterly data from the Federal Reserve, which tracks residential real estate, home equity holdings across the country rose by $177 billion. That sounds massive but it's actually down significantly from the previous quarter, when equity soared by $452 billion — nudging half a trillion dollars.

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So what's going on and how does this affect you?

First, some basics. Your equity is the difference between the current resale value of your home and the mortgage debt you've got on it. If your house would sell this weekend for $300,000 and your mortgage balance is $150,000, you've got $150,000 in equity, not counting transaction costs. This is wealth stored away in your own private real estate savings account.

You can sit on it or borrow against it to finance home improvements or college tuitions, and you can factor it into your retirement plans. According to the Federal Reserve, home equity holdings in the latest quarter hit $10.84 trillion. That's up from $6.4 trillion as recently as 2011. These are big, brain-numbing numbers, no doubt, but equity is a crucially important subject for millions of people who are counting on it.

The rapid growth in equity has been powered primarily by post-recession gains in home-selling prices and by homeowners paying down mortgage principal debts owed to banks. Total homeowner mortgage debt outstanding has continued to fall steadily, and is now well below what it was in 2009. Roughly 1 in 3 homes is mortgage-free, owned outright, according to industry estimates. About 11 million owners have equity stakes of at least 50%, reports housing data firm RealtyTrac.

The flip side of the upbeat equity picture is negative equity — underwater homes where debt exceeds resale value. Fifteen percent of all houses with mortgages are still in serious negative equity territory. The RealtyTrac study defines "serious" as owing at least 25% more on the mortgage than the resale value of the home — an outstanding unpaid balance of $375,000 or more on a $300,000 property, $500,000 or more on a $400,000 house.

Despite the increases in prices that many parts of the country have experienced since the recovery began in 2012, an estimated 8.1 million houses remain seriously underwater, making them difficult to resell or refinance.

Much of the negative-equity pain is concentrated in a handful of states where home values went into free fall during the housing bust years or where local economic growth has lagged behind the national recovery and unemployment remains high. In Nevada, 31% of homes remain in negative territory; in Florida, it's 28%, Illinois 26%, Michigan 25%, Rhode Island 22% and Ohio 20%. One surprise on the seriously negative equity list: Maryland, which contains some of the wealthiest counties in the country, has an 18% negative rate. Virginia comes in at just 8% and the District of Columbia at 10%.

Arizona, which experienced among the steepest drops in prices during the recession, has rebounded with vigor and now has a serious negative equity rate of 18%, just slightly above the national average of 15%. California, where post-bust home price appreciation has far outpaced that of all other states in recent years, now has a below-average serious negative rate: 12%.

Where are the folks with high equity stakes — those with 50% plus? Not surprisingly they tend to have owned their homes for well over a decade and live in higher-cost houses ($500,000 and up) in above-average priced markets. Hawaii has more equity-rich residents than any other state — 35%. New York and Vermont come in next at 33%, followed by California (30%) and the District of Columbia (27%).

Bottom line on the latest equity numbers: They're basically good news. Fewer people are underwater — back in the dark days of the bust more than half of owners in some of the worst-hit markets were underwater. Plus the slowdown in prices nationwide is healthy. More modest growth in list prices means more potential purchasers can afford your house when it's time to sell.

Distributed by Washington Post Writers Group.

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