U.S. home values have returned to roughly the same levels they were at in early 2005, near the peak of the housing boom, bringing millions of formerly underwater homeowners back to positive equity, according to new government figures.

Home prices posted an annual gain of 8.2 percent through October 2013, according to the Federal Housing Finance Agency's (FHFA) purchase-only index, which rose to a reading of 207.2. That's comparable to levels reached in the spring of 2005, and is roughly the midpoint between the index's peak of 225 reached in Spring 2007 and the post-crash lows of under 180 reached in mid- to late 2011.

Underwater loans down by nearly half

The increase has helped cut the number of underwater homeowners nearly in half since the beginning of 2012, according to a summary provided in the federal government's newly released December 2013 Housing Scorecard. That figure fell from 12.1 million to 6.4 million as of the third quarter of the year, while the percentage of underwater mortgages dropped from 25.2 percent of all homes mortgaged to 13.0 percent over the same period.

During the same time, total homeowner equity - the value of all residential property minus the outstanding balance on mortgages - rose by 55 percent, to $9.7 trillion.

"Trapped" homeowners being freed; equity lending thaws

The increase in home equity and values has several positive implications for the housing market overall. First, the sharp decline in underwater homeowners is more evidence of the passing of the foreclosure crisis, as homeowners in positive equity are much less likely to go into foreclosure than those who are underwater on their mortgages.

The rise in home values also means that many homeowners who previously wished to sell but were trapped in their homes by negative equity are now in free to do so. This should result in more homes coming on the market as owners are able to sell without incurring a loss, helping ease what has been a tight supply of available homes for sale.

Equity lending thaws

In addition, the overall increase in home equity and rise in home values means that more homeowners who wish to do so will be able to obtain access to home equity loans, a common source of funds for home improvements and repairs. Many homeowners have had to defer such work in recent years due to an inability to obtain financing.

Homeowners who are back in positive equity or have greater equity are also in a better position to refinance their current mortgages. That's a particular benefit for borrowers who have been unable to refinance through the federal Home Affordable Refinance Program (HARP) because they have subprime mortgages that were not backed by Fannie Mae or Freddie Mac or who wish to refinance a primary and secondary mortgage into a single loan.

Published on January 14, 2014