Effective Equity on the Central Coast - February 9, 2015

The economy has hit full blown recovery mode. Economic indicators are up almost across the boards, and look to be continuing that way for the foreseeable future. The Federal Reserve is gearing up to end its assistance and raise rates as more and more positive news comes forth. So why isn’t this being felt by the average consumer? As most of you reading this know, a large portion of that has to do with stagnant wage growth. Employment numbers are up, but wages haven’t been able to make any real sustainable growth. But there’s another major factor that isn’t discussed with the same regularity as wage growth, and that’s home price.

Effective Equity
Similar to the larger economy, most real estate indicators have been generally positive. And a glance at the numbers paints a fairly rosy picture. Home prices are up, the sales of distressed assets are down, and construction has gradually been picking up. So why does it not feel that much improved to the average person? The percentage of homes with negative equity rests a hair below 17 percent nationally. Which is fantastic compared to the height of the recession when it was closer to 31 percent. But as it is with most statistics, these numbers hide certain realities. Enter effective negative equity. Selling and buying a new home is a costly affair, and as a result, even having some positive equity may not be enough to cover the costs. In cases where homeowners have less than 20 percent equity in their homes, they generally cannot afford to “move up” and act as a driving force on the economy. When you count these homeowners with minimal positive equity, the rate of effective negative equity stands at 35 percent, even higher than the 31 percent earlier. And therein lays the crux of the problem for this recovery in the eyes of the average American. Things are getting better on paper, but not by enough for the average consumer. A rising GDP, increased retail sales, a record setting stock market: all of these are indicative of a resurgent economy, but these hardly affect the daily lives of most of America.

The Local Picture
Despite being one of the strongest housing markets in the country, the Bay Area and Central Coast are not immune to these forces. The number of “underwater” homeowners is below the national average, with Santa Cruz County at 8 percent, Santa Clara County at 4 percent and Monterey County at 16 percent. Yet those numbers jump dramatically when factoring the effective negative equity. Santa Cruz County more than doubles to 19 percent, Santa Clara County nearly triples to 11 percent, and Monterey County reaches 28 percent.
Despite the bleak picture, it’s not all bad news. Prices have continued to climb, albeit at a slower rate than they had been earlier in the recovery. Analysts are forecasting the negative equity rate to keep falling and hit 15.2 percent by the end of Q3 2015. Local numbers have remained strong and are consistently better than the national average, which is promising moving forward. According to Zillow, Santa Cruz County grew at 7.8 percent this previous year, and has been forecast to grow by 5.4 percent. This is in contrast to the national average of 6.6 and 2.9 percent respectively, putting property values in the region well above average.

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