When is it OK to tap home equity?

 

NEW YORK – Sept. 21, 2018 – As a result of rising home values, many homeowners find that they're sitting on a record amount of home equity that they could access by refinancing or taking out a second mortgage. However, people have been shy about tapping into that wealth, in part because the home prices decreases during the recession that left many owners underwater.

However, a new survey from Bankrate.com of 1,000 consumers shows that homeowners have plenty of legitimate reasons to take out a loan to unlock it.

Consumers' "growing penchant toward debt might make it tempting to tap into their home's value," says Greg McBride, Bankrate's chief financial analyst.

Nearly three quarters of homeowners recently surveyed say that home improvements or repairs are an acceptable reason to access the equity they have in their homes. In fact, more than half of those surveyed say that is the best reason to apply for a cash-out refinance loan or home equity line of credit (HELOC).

Survey respondents cited other reasons they'd be tempted to use their home equity, including to consolidate debt (44 percent);

• Pay for tuition or other educational expenses (31 percent)
• Keep up with regular household bills (15 percent)
• Make other investments (12 percent)
• Big purchases (9 percent believe it would be a good idea to use home equity to purchase big-ticket items, such as appliances and furniture)

People with lower incomes were more likely than higher earners to say it's OK to tap into home equity to meet ordinary expenses, the survey found; and millennials seem more willing to tap into home equity than older generations: 22 percent of millennial respondents say that borrowing from home equity to pay day-to-day bills is a viable option, compared with 12 percent of members of older generations.

Even homeowners with doubts about tapping in their home equity may be tempted to do so. Many households are overstretched financially, which could heighten the temptation to borrow. According to a recent Federal Reserve report, 44 percent of Americans say they could not cover a $400 emergency expense out of pocket.

"With the sorry state of emergency savings and increasing levels of consumer debt in a rising interest-rate environment, it's a matter of 'when' not 'if' more homeowners turn to home equity to fund home improvements and repairs, or consolidate debt," McBride noted in the survey's report.

Using equity to pay for home improvements that increase the value of your home can help rebuild any of the equity taken out, McBride says. The new tax law that went into effect this year also allows homeowners to deduct the interest they pay on home equity loans and HELOCs if the proceeds are used to finance improvements that add significant home value.

Still, financial experts recommend caution for homeowners thinking about borrowing against their home equity, especially because using a home as collateral means they could lose it if they're unable to repay the lender.

"For a disciplined homeowner, using home equity to consolidate debt at a lower interest rate can be a savvy way to cut interest costs and accelerate debt repayment," McBride says. "But for undisciplined homeowners, it ties up an asset that is put at further risk of foreclosure while the temptation to run up high-cost debt all over again proves difficult to resist."

Source: "Renovations Best Reason to Tap Home Equity, Homeowners Say," Bankrate.com (Sept. 19, 2018)

© Copyright 2018 INFORMATION INC., Bethesda, MD (301) 215-4688

Devastating hurricanes have a few beneficial side effects

 

NEW YORK – Sept. 21, 2018 – Hurricanes impose huge losses of wealth and initially slow regional economies, but over time they can be a tonic that creates more prosperous communities. After Florence, resort areas along the coast and thriving commercial areas inland are likely to rebuild quickly, but poorer, rural inland communities may be left to languish.

Initial estimates of the destruction from the storm range of $17 billion to $22 billion but may go much higher. The sums paid out to homeowners will only be a fraction of losses because many homeowners' policies do not include flood coverage and often contain high deductibles for hurricane damage.

As hurricanes go, Florence could be among the 10 most costly to hit the United States but won't be near the top of the list. When Katrina hit New Orleans in 2005, the figure was $161 billion, and last year, Maria hit Puerto Rico and Harvey trounced Texas with losses of $90 billion and $125 billion.

Florence's path includes valuable beach homes, hotels and attractions, and inland activities vital to the national economy – Boeing, Daimler and Volvo factories halted production ahead of the storm.

Hurricanes hitting those areas provide opportunities to start over and replace with larger and more modern facilities. After Hugo (1989) and more recent storms hit the Outer Banks, smaller beach homes on large plots were replaced by structures with more bedrooms, baths and attractive kitchens that could more comfortably accommodate large families and command higher rents. Insurance settlements permitted owners of aging restaurants and amusements to reinvest in more attractive businesses.

This increased the value of the shoreline and nearby shopping malls and other businesses. It permitted owners who were inadequately insured to more easily borrow to rebuild or recoup some of their losses by selling land at better prices.

Seventy percent of the flood damage imposed by Harvey, which hit Texas last year, was not insured. Many homeowners took their chances with the weather and got burned, or were not aware that ordinary homeowners' policies often don't cover flooding. Many moderate-income families and smaller businesses are struggling and may never find the money to rebuild.

In some rural areas, far from coveted beachfront and big employers, the values of property and homes were well below the regional and national averages before the storm. Those communities may never adequately recover – land values, if anything, will lag further and permanently.

It seems homeowners and businesses buy insurance immediately after a hurricane, become complacent as storm memories fade and then get caught when disaster strikes again. Communities hit by Florence are ripe for a repeat of such tragic situations.

The National Flood Insurance program has about 134,000 policies in place in North Carolina – less than 15 percent of residences and down 3.6 percent from 2013.

Economic impact less than thought

Storms temporarily depress regional economies but not as much as folks think – a lot of activity gets shifted around. Folks evacuated, factories closed and movie theaters lost a lot of patronage ahead of Florence, but inland shelters hired staff, fleeing evacuees purchased gas and groceries, hardware stores did a robust business in sandbags, emergency pumps and the like, and livestock producers piled up on feed and fuel to keep their animals safe in barns.

When the storm passes, lost production at aircraft and auto factories will be made up and the rebuilding of homes and commercial establishments will have profound multiplier effects for the local economy.

On net, storms tend to subtract from GDP in the early months and add to it in later months – leaving the economy, on balance, with few overall effects after a year.

We are poorer – property and wealth are destroyed. Payouts from insurance companies reduce shareholder value. Uninsured property owners in more attractive locations may get a lift in land values, but those gains do not fully compensate for ruined residential and commercial structures.

Those who plan ahead – buy enough of the right insurance and don't build on the shore or flood plains unless their business interests absolutely require – generally recover. Investors from outside the region get opportunities to bring in new capital to improve local economies.

Those that take their chances with the weather lose. They get saddled with bigger mortgages or too little money to rebuild and broken lives.

Copyright © 2018 News World Communications, Inc.; Peter Morici is a professor at the Smith School of Business, University of Maryland, and former chief economist at the U.S. International Trade Commission.

70 Indian Bayou Dr, Destin, FL

Most vacation buyers want income – not family getaways

 

AUSTIN, Texas – Sept. 17, 2018 – The international market for second homes changed significantly over the past ten years. Buyers now prioritize rental income over purchasing exclusively for their own use, according to a new international survey – Spotlight: Second Homes – Global Trends in Ownership and Renting – from real estate adviser Savills and HomeAway.

In the 1970s, nine out of 10 owners kept their second homes to themselves. Even as recently as 2000, eight out of 10 owners never rented their properties to travelers. A period of rapid change now finds that more than two-thirds of owners rent their second homes for at least part of the year to cover some or all of their ownership costs.

For the first time, owners' primary motivation for ownership is rental income potential, which has overtaken family getaways as the initial use for a second home.

"In a low-interest rate environment, investors are seeking out income-generating assets," says Paul Tostevin, associate director, Savills world research. "Today's second-home buyers want properties to work for them financially, and they are increasingly looking not just to cover costs but to turn a profit."

The credit-fueled boom of the early 2000s and online expansion of the travel industry triggered rapid growth in the market for additional vacation homes across the U.S. and Europe. Low-cost airlines opened new destination choices overseas. British buyers became particularly active in second-home acquisition overseas.

When the global financial crisis hit, national housing markets contracted and demand for second homes fell. The market retreated to prime, established locations, led by wealthy, capital-rich individuals with little or no reliance on borrowing. While growth resumed in recent years, however, the sector looks very different, with smaller and cheaper properties leading the market and buyers attuned to the potential for income.

Traveler demands have also changed. With more travelers using online marketplaces for short-term rental accommodation, the market has become much more accessible for owners to rent their properties, even beyond the traditional family holiday at the beach or ski slopes.

"Global tourism continues to grow, with international tourist arrivals up by seven percent last year to a record 1.3 billion. At the same time, the rapid expansion of online vacation home platforms … opens the market to new target groups and makes it much easier for owners to make their properties income-producing," adds Tostevin.

Based on the survey sample, the average price of a property purchased last year stood at $291,000 – 37 percent less than a decade ago. Just over a third (34 percent) of properties bought were condos, up from a quarter over the last 10 years, reflecting the changing nature of the second-home market.

A third of all owners cover costs with rental income, and another third make a profit. The average gross yield across the sample stands at 6.4 percent, or 3.9 percent after costs, but excludes taxes.

In the U.S., Florida is top of the list for ownership, accounting for 14 percent of second homes, followed by California (7 percent) and North Carolina (4 percent). Americans are the primary international investors of vacation homes in neighboring Mexico and Canada.

Seventy percent of U.S. owners completely cover the cost of ownership with rental income.

British second-home buyers shop more widely than all other nationalities represented in the survey, with only 24 percent of second homes located in the UK. France accounts for 19 percent of properties owned and Spain 16 percent, while the top three location choices by international owners are The Algarve (5 percent), Costa del Sol (4 percent) and Costa Blanca (4 percent).

Similarly, only a quarter of Dutch-owned second homes are in the Netherlands. Across all other nationalities represented in the survey a majority own second homes in their own country. A very clear majority of French (86 percent) and American (85 percent) owners favor their home turf.

The Spanish, Italian and Portuguese – all countries favored by vacationers – strongly favor their own countries, with less than 5 percent of their additional homes bought overseas.

© 2018 Florida Realtors®