Californian home owners are sitting on hundreds of thousands of dollars in equity and even if there is a bubble that pops, the cash should easily see them through hard times.
A report from the California Building Industry Association says home owners who purchased a single-family detached home in 2000 now enjoy a median $260,630 in equity. Condo owners' homes have earned them a median $226,831 in equity, in both cases, as of the first quarter of 2005.
Even those who purchased homes just last year have a sizable cache -- $100,755 in equity for single-family home owners and $84,672 for condo owners.
Statewide, the Golden State's gold mine of equity has grown by more than $1 trillion in the past five years. In the coming years, home owners can expect additional annual equity gains as high as $50,000.
The totals include a 15 percent down payment as part of the equity.
Equity is the difference between a home's value and the outstanding mortgage on a loan. It begins with a down payment, if any, and grows as the owner pays down the principal and as market forces increase the home's value.
"There has been much talk given to the so-called 'housing bubble' that some feel exists in the California housing market, due to recent price appreciation. What has not been as widely discussed though is the amount of home equity that as been accumulated by home owners in California," said CBIA's chief economist Alan Nevin.
In the past five years, California's home prices have grown by 103.02 percent, faster than any other state in the nation. Only Washington, D.C.'s home prices have grown faster, by 108.12, according to the Office of Federal Housing Enterprise Oversight's first quarter 2005 Home Price Index .
OFHEO says only Nevada has seen faster home price growth in the past year, 31.22 percent, compared to California at 25.42 and since 1980, only Rhode Island has seen greater home price growth, 446.35 percent compared to 426.09 percent for California.
Studies show an estimated 10 to 50 percent of all home owners actually tap their equity, say with equity loans, second mortgages or cash-out refinances, and that range is likely higher in California where the cost of living is higher.
Any equity loan, obviously, is an equity depleting loan and experts say the money is best used for capital improvements and investments that provide an equal or better return on your money than the cost of the loan. Home improvements, education for the kids and new business financing are relatively better uses of equity than buying cars and boats, debt consolidation and vacations.
Another acceptable home equity uses can be emergencies or unforeseen financial events that reduce your income or place added demands on your wages -- job loss, births, illness, injury, death and others.
CBIA's study does not indicate how many home owners have actually used the equity, but Nevin says much of the equity has already been plowed back into the economy through refinancing, allowing homeowners to buy goods and services they wouldn't have been able to afford otherwise. The activity also helps keep California's economy growing. Consumer spending is the national economy's premium fuel.
Nevin said despite the equity use and steep increases in home values, he doesn't foresee a housing bubble suddenly deflated. The underlying demand for homes remains stronger than incentives to build enough homes. For years the market has demanded 250,000 new homes a year and builders construct less than 200,000, he said.
He does believe equity gains will slow, dropping to the still lucrative range of 6 to 8 percent per year, provided 30-year fixed-interest-rage mortgages stay in a range of 5.75 percent to 6 percent.
"For most Californians, their homes will go up $30,000 to $50,000 a year," Nevin said.