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Booming Home Equity, Financial Opportunity or Warning Sign?

If you’ve got it, don’t piggybank it — borrow against it.

That seems to be the prevailing sentiment among tens of thousands of American homeowners who’ve seen their property values surge and then decided: Hey, we’ve got a ton of equity sitting here, let’s do something with it.

According to the latest estimates from real estate analytics firm ATTOM Data Solutions, 347,875 new home-equity lines of credit (HELOCs) were taken out during the first quarter of this year — up a surprising 18 percent from the final quarter of 2017 and 14 percent higher than the same time last year.

The increase is eye-opening in part because last year’s federal tax law changes were seen as a major negative for home-equity borrowing. The law removed interest deductibility for home-equity loan balances — new and existing — that are not used to renovate, build or acquire a home. The loss of deductibility made tapping home equity more expensive on an after-tax basis for many borrowers.

But owners apparently haven’t been deterred. Not only have new borrowings for HELOCs risen sharply this year, but another form of equity-tapping — cash-out refinancings — has hit its highest level since the housing boom. In a cash-out refi, a homeowner pays off an existing mortgage and replaces it with a new, larger loan. The owner can pocket the difference, tax-free, and spend the money on whatever he or she chooses.

In the first quarter of this year, 68 percent of all refinancings at investor Freddie Mac involved cash-outs. Though total volumes of refinancings are down significantly, cash-outs are at their highest percentage since the fourth quarter of 2007, just before the crash.

Are the sizable jumps in equity-tapping portents that we shouldn’t ignore? In the years immediately preceding the financial crisis, many homeowners used HELOCs like credit cards or ATMs — hocking their inflated property values to finance boats, autos, even daily living expenses — until the game ended. Home prices sagged and crashed; owners’ equity holdings turned to vapor.

Some economists have worries, but most point out that today’s market and regulatory conditions are markedly different. Most banks now require borrowers to have relatively high credit scores and a cushion of equity — generally 20 percent of the estimated home value — and to document everything. Back in the funny-money heydays of the boom, some lenders essentially required no equity and no documentation — even negative equity was occasionally OK. Today’s credit scores, by contrast, according to Amy Crews Cutts, chief economist for Equifax, are high: A median 770 Vantage score for HELOCs and 713 for home equity loans or second mortgages.

But there are concerns. Frank Nothaft, chief economist for CoreLogic, a real estate valuation and data analytics firm, notes that one-third of the largest metropolitan markets are now “overvalued” — there’s a mismatch between the frothy growth rate in median home prices compared with growth in per capita incomes. During the lead-up years to the crash, two-thirds of all metro markets were overvalued.

Nothaft suggests that although the U.S. is not in a “valuation bubble,” there are “many urban areas where prices appear to have become de-linked to the long-term relationship with income” and thus affordability. That “raises the specter of a new bubble forming within the next few years,” he warns.

Sam Khater, chief economist for Freddie Mac, argues that fears about the fast growth in cash-out refinancings are misplaced. Though rising cash-out levels coincided with the boom years, he said in an interview, today they’re less meaningful because the number of refinancings has fallen dramatically in the past year as interest rates have increased. Most owners who have refinanced this year, he said, have not been seeking lower interest rates but rather equity extraction, raising the cash-out percentage.

Today’s owners appear to be making more responsible use of their home-equity borrowings. In a study of equity-loan requests on its network of banks and mortgage companies so far this year, Lending Tree, the online shopping comparison platform, found that 81.2 percent of owners said they plan to use the loan proceeds either for home improvements or debt consolidation. The latter can be a smart move because it allows the owner to pay off credit card bills and other high-cost debts with relatively low-cost home-equity dollars.

But remember this about home equity: It’s not money in the bank. It’s wealth that depends on market movements and can melt if the market turns. 


Mark Your Calanders 

July 4th - Spero Fun Run 5k - Kersting Court @ 8:00am

July 4th - Sierra Madres Fourth of July Parade - Sierra Madre Boulevard @ 10:00am - 12:00pm 

July 4th - AMERICAFEST - Rose Bowl Stadium @ 2:00pm - 10:30pm 

July 5th - Thursday Summer Fun: Color Fun - Norton Simon Museum @ 1pm-3pm

July 5th - Elementary Grab Bag Thursdays - Altadena Library District @ 2pm

July 5th - Music on The Main: Incendio - Descanso Gardens @ 6:00pm - 7:30pm 

July 7th - Pasadena Farmers Market at Victory Park - Victory Park @ 8:30am - 12:30pm 

July 7th - Growing Succulents - Armstrong Garden Centers Pasadena @ 9:00am

July 7th - Old Pasadena Historic District Walking Tour - Old Pasadena @ 9:00am 

July 7th - Taste of Art: The Founding Foodies - The Huntington Library, Art Collections, and Botanical Gardens @ 9:00am - 12:30pm 

July 7th - Mt. Wilson Observatory Walking Tours - Mt. Wilson Observatory @ 11:30am & 1:00pm

July 8th - R.G. Canning Flea Market - Rose Bowl Stadium @ 5:00am - 4:30pm 

July 9th - Japanese Tea House Tours  - The Huntington's Japanese Garden @ 11:30am - 3:30pm

July 13th - DineLA - Participating Local Restaurants and Bars @ All Day Event 

July 14th - Pasadena Farmers Market at Victory Park - Victory Park @ 8:30am - 12:30pm 

July 15th - PCDA Rose Soiree - dusitD2 Hotel Constance @ 5:00pm - 8:00pm 

July 15th - Music in The Park My Generation - La Canada Memorial Park @ 6:00pm - 8:00pm 

July 17th - Free Tuesday at Descanso Gardens - Descanso Gardens @ 9:00am - 5:00pm 

July 19th -  South Pasadena Farmers' Markert 19th Anniversary - Corner of El Centro St. and Meridian Ave. @ 4:00pm - 8:00pm 

July 20th - 22nd - 626 Night Market - Santa Anita Park @ 4:00pm - 1:00am

July 21st - Pasadena Farmers Market at Victory Park - Victory Park @ 8:30am - 12:30pm 

July 21st - Chalk Walk - Altadena Library District @ 10:00am - 3:00pm 

July 25th - Summer Songs at Descanso Gardens @ 5:30pm - 8:00pm

July 27th - Movies in The Park: Moana - Victory Park @ 7:30pm

July 28th - Pasadena Farmers Market at Victory Park - Victory Park @ 8:30am - 12:30pm

July 29th - Come "California Dreamin" at The Langham This Summer - The Langham Huntington Pasadena @ 5:00pm - 9:00pm 


Contract Corner

What is an Option to Purchase Agreement?

An option to purchase is an agreement that gives a potential buyer (“optionee”) the right, but not the obligation, to buy property in the future.  An option differs from an offer to purchase.  Once an offer to purchase has been accepted, and contingencies have been removed, if the buyer fails to purchase the buyer likely will be in breach of contract.  Once an option has been accepted, up until the time the potential buyer exercises the option, the buyer can unilaterally decide not to buy and will not be in breach.  However, because the seller is giving the buyer this unfettered right to decide in the future whether or not to buy, the option needs to be supported by consideration, usually money, which is non-refundable.  The consideration may be applied toward the purchase price if the buyer exercises the option but not necessarily.    Furthermore, the optionee must exercise his/her option by giving notice to the optionor as specified in the agreement. Typically, a purchase agreement will be attached to an option agreement.  The purchase agreement will not come into effect until the option is exercised. 

Navigating through the labyrinth of details and information of a transaction is exactly why you, savvy buyers and sellers, need an experienced team. The SARKISSIAN + PERERA GROUP is here to help guide you through this process and ensure that you achieve all of your real estate goals! 

© 2018 Berkshire Hathaway HomeServices California Properties (BHHSCP) is a member of the franchise system of BHH Affiliates LLC. Any unauthorized reproduction or use of this material is prohibited. This information is believed to be accurate as of July 2, 2018. It is not intended as a substitute for legal advice in individual situations, and is not intended to nor does it create a standard of care for real estate professionals. BHH Affiliates LLC and BHHSCP do not guarantee accuracy of all data. Information has been obtained from various sources and will not be verified by broker or MLS.


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