Philadelphia-area homeowners are getting rich quick on rising prices

Rising home prices can be a challenge for aspiring buyers, but homeowners are taking advantage of the rising value of their homes. For most families, owning property is the main way to build wealth.

In the metropolitan area that includes Philadelphia, Camden and Wilmington, a typical home owner earned over $110,000 in equity whether that person has lived in the home for five years, according to an analysis released this month by the National Association of Realtors. Homeowners accumulate equity, or real estate wealth, through price growth and mortgage repayments. It’s the difference between the value of a home and what a homeowner owes.

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Home equity gives repeat buyers a head start in the housing market compared to most first-time home buyers who don’t have the money to compete. Homeowners can also borrow money from their home’s equity to make repairs or renovations, pay off student loans or medical bills, start a business, or help pay for their children’s education. Tapping into home equity is generally cheaper than using personal loans and much cheaper than using credit cards.

The potential financial benefits of home ownership become social benefits, “enabling the next generation to climb the economic ladder,” said Gay Cororaton, senior economist and director of housing and business research at the National Association of Realtors.

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Robust price growth is driving most of the capital gains currently enjoyed by homeowners, so people who are in a position to become homeowners should buy soon to take advantage, she said, ” because home equity accumulates over time.” But in the recent strong market, even five years is enough to earn six figures of wealth.

The typical Philadelphia-area homeowner who sold a single-family home in the summer of 2021 after staying for:

  • five years, gained $112,100 in equity if purchased at the median price of $234,800.

  • 10 years, gained $145,800 in equity if purchased at the median price of $219,600.

  • 15, gained $146,800 in equity if purchased at the median price of $236,200.

  • 30, gained $314,900 in equity if purchased at the median price of $120,200.

Home value, of course, depends on the features, condition and location of the home. The housing slump that triggered the Great Recession rattled capital gains for homeowners who bought about 15 years ago. But, typically, homeowners don’t have to do much to build equity other than stay in their homes and keep up with maintenance and repairs so homes can sell.

Homeowners stay in their properties for a median length of eight to ten years, according to the National Association of Realtors. Typically, homeowners need 15% to 20% equity in their home before lenders are comfortable providing home equity loans, said Jacob Channel, senior economics analyst at LendingTree.

Using home equity can be a good option for a homeowner with a big expense who doesn’t want to drain their savings, “especially in today’s market where home prices have risen so dramatically in so shortly,” he said.

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Nationally, a homeowner who bought an existing single-family home 10 years ago would have added $225,000 to the home’s equity if the home had sold in the summer of 2021 at the median price of $363,100. $. That’s for a homeowner who bought at the median sale price of $169,000, according to the National Association of Realtors.

The association’s calculations assume repayment of the principal of a 30-year fixed rate loan with a 10% down payment.

The median sale price of an existing single-family home increased by 8.5% per year from summer 2016 to summer 2021.

As prices begin to calm down over the next few years from skyrocketing growth, some people may find that their home is worth a little less than they paid for, but that’s not necessarily something to consider. there is cause for concern, Channel said. Real estate is a long game, and those who hold onto properties for the next 10 years or more should always come out on top, he said.

Homeowners who don’t want to stay in their home for more than a few years but want to take full advantage of the equity in construction can consider renting out their home, said Robin Olanrewaju, founder of Sound Financial Solutions, a financial advisory firm based in Pennsylvania. which operates in the tri-state area.

“So you still have the property and the value of that property which will increase your wealth and the net worth you have in your investment portfolio,” she said. “Most people think it’s an all-or-nothing type of situation. No, you look at the assets you have and find the best way to leverage them throughout your life.

READ MORE: Why is your home equity important when trying to refinance your mortgage?

As prices continue to rise and homeowners accumulate equity, potential buyers must also be able to afford the homes that come on the market, which can be increasingly difficult. Wage growth has not kept pace. In the Philadelphia metropolitan area, salaries have increased 2.8% per year over the past five years, according to an analysis by the National Association of Realtors. During this period, home sales prices increased by 6.7% per year.

“Homeownership is great, but if only the already wealthy and those with higher incomes can enjoy it, we need to find ways to expand that homeownership affordability,” said Cororaton of the National Association of Realtors.

The lack of housing supply continues to drive up prices, she said. So an increase in supply – including the construction of new houses – can help.

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