A Drop in Equity Doesn’t Mean Low Equity
You may have seen media reports concerning a reduction in homeowner equity. What's critical to understand is that equity is inextricably linked to home values. As a result, as home values rise, equity will rise as well. When property values fall, so does equity. Here's how it's recently played out.
During the 'unicorn' years, home prices climbed significantly. This provided a significant equity boost to homeowners. Those 'unicorn' years, however, couldn't last forever. The market has to level off at some time, and we witnessed that last fall and winter.
Equity was damaged as home prices fell modestly in the second half of 2022. According to the most recent CoreLogic study, homeowner equity has decreased by 0.7% in the last year. However, the headlines reporting on the shift do not provide the complete picture. While home price declines in the second part of last year reduced equity, figures show that homeowners still have near-record levels of equity.
The graph below illustrates this concept by examining the total amount of tappable stock in the United States from 2005. Tappable equity is the amount of equity available to homeowners before reaching a maximum loan-to-value ratio (LTV) of 80%. As the data reveals, there was a considerable increase in equity during the 'unicorn' years as property prices rose significantly (see the pink in the graph below).
But here's the important thing to remember: even though there has been a slight drop, total homeowner equity is still far more than it was prior to the 'unicorn' years.
There's even more excellent news. According to recent home price data, the worst home price decreases are behind us, and prices have begun to rise again. According to Selma Hepp, Chief Economist at CoreLogic:
“Home equity trends closely follow home price changes. As a result, while the average amount of equity declined from a year ago, it increased from the fourth quarter of 2022, as monthly home prices growth accelerated in early 2023.”
The last portion of the comment is crucial, and it is the missing piece of the puzzle that the media is ignoring. To underscore the already encouraging trend, experts predict that housing prices will rise at a more regular rate during the following year. Hepp says it thus way in the same report:
“The average U.S. homeowner now has more than $274,000 in equity – up significantly from $182,000 before the pandemic. Also, while homeowners in some areas of the country who bought a property last spring have no equity as a result of price losses, forecasted home price appreciation over the next year should help many borrowers regain some of that lost equity.”
Even though Odeta Kushi, Deputy Chief Economist at First American, uses a slightly different statistic, she confirms that homeowners have a lot of equity right now:
“Homeowners today have an average of $302,000 in equity in their homes.”
That means that if you've owned your house for a few years, you're probably still sitting on a lot more equity than you were before the 'unicorn' years. And if you've only been in your house for a year or so, the projection for more usual price appreciation over the next year should imply your equity is already on the rise.
When it comes to headlines, context is essential. While homeowner equity has fallen slightly since last year, it remains near all-time highs. Reach out to a trustworthy real estate professional to receive the answers you need from an expert who is ready to assist you as you plan your move this year.
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