Home values rise 5.3% and gain is tax-free; 57% of homeowners who refinance are tapping their equity


YOUR STOCKS or mutual funds may -- or may not -- have gained much in value this year. But unless you live in one of a handful of places around the country, you can be certain of this: Your home racked up solid appreciation gains in the past 12 months -- 5.3 percent on average nationwide, and 8 percent to 9 percent in the hottest statewide markets, such as Massachusetts, Minnesota and Colorado, plus Washington, D.C.

And unlike your stock market profits, there's an extra layer of icing on top of your home's appreciation: It's tax-free, and readily convertible to cash if you need it -- which is what growing numbers of American consumers are doing. Two new national statistical studies highlight the continuing, impressive jumps under way in home values, and how owners are turning at least some of that appreciated equity into spendable dollars.

The first study, prepared by a federal agency that monitors the housing economy, documents what gleeful homeowners and sellers suspected: Inflation in most goods and services may be in the 1 percent to 2 percent per year range, but home values are jumping at four to five times that pace, according to the latest data from the Office of Federal Housing Enterprise Oversight.

Even three out of the four slowest-appreciating markets -- Nevada, Pennsylvania and Idaho, with gains in resale value of 3 percent or less -- are beating inflation in the overall economy. Hawaii posted a scant 0.1 percent appreciation rate during the past 12 months.

Massachusetts continues to lead the nation's resale-value boom, with a 9.3 percent average gain per house in the past year, and nearly a 30 percent increase over the past five years. That's especially impressive given Massachusetts' high-cost housing stock.

If you bought a $300,000 house outside Boston last year, it's probably worth about $327,000 today. If you bought it in 1994, it's probably worth about $386,000. Other relatively pricey home real estate areas are not far behind. Here are some study highlights: After a slow start this decade, the District of Columbia now is the second-fastest appreciating market in the country, with an 8.3 percent gain in the past year.

Minnesota (8.1 percent), Colorado (8 percent) and California (7.7 percent) are also near the top of the pack. Colorado and Minnesota are among the hottest appreciation markets of the past five years, with aggregate jumps of 37.4 percent and 31.1 percent, respectively.

Fifteen other states racked up residential real estate appreciation rates of 5 percent or higher during the past 12 months, including Georgia (6.9 percent), Michigan (6.5 percent), Washington (6.1 percent), Maine (6 percent), South Carolina (5.9 percent), Kansas (5.7 percent), New York (5.5 percent), Nebraska (5.4 percent), Missouri, Wisconsin and Ohio (5.3 percent), Mississippi and Connecticut (5.1 percent), and Montana and Texas (5 percent).

Even the middle- and lower-performing markets turned in resale-gain rates well ahead of inflation in the larger economy: Arizona (4.9 percent), Kentucky (4.7 percent), Alaska and North Carolina (4.6 percent), Iowa (4.5 percent), Indiana (4.2 percent), Tennessee (4.1 percent), Illinois (4 percent), Rhode Island (4.9 percent), Florida and Virginia (3.7 percent), Oklahoma (3.6 percent), and Maryland (3.2 percent).

A few markets that had been hot spots earlier in the decade have begun to cool markedly. For example, Oregon homes gained 3.6 percent last year, but rose an aggregate 37.2 percent from 1994 to the present. Utah, with the highest five-year appreciation rate in the country at 41.5 percent, averaged 3.3 percent last year.

So what are the owners of these high-inflation homes around the country doing with their equity gains? According to a study by mortgage market giant Freddie Mac, many of them are cashing out a portion of their profits tax-free in the form of cash. Freddie Mac's latest survey found that 57 percent of all homeowners who refinanced are tapping their equity by increasing their loan amounts -- so-called "cash-out refi's." There's no tax due on whatever you pull out to spend.

Say you're the lucky owner of that $300,000 house bought near Boston in 1994 that's worth about $386,000. You need money for your kid's college tuition, or you need money to invest, buy a boat, a new car or whatever. You convert your equity into spendable dollars either by increasing your principal balance via a cash-out refi -- say from $275,000 up to $325,000 -- or by taking out a home equity loan or credit line in the same amount.

It's your equity, you need it, so why not -- as long as you can handle the higher payments and you don't leave yourself too thin an equity stake in your home. After all, you don't want to assume that the super-appreciation party of the 1990s is going to continue indefinitely. Because it won't.

Kenneth R. Harney is a syndicated columnist. Send letters care of the Washington Post Writers Group, 1150 15th St. N.W., Washington, D.C. 20071.

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