You’ve probably heard media coverage about a drop in homeowner equity lately. It can be concerning to hear about, but it’s essential to understand the relationship between equity and home values. As home prices rise, equity grows, and when prices fall, equity does too. In recent years, this relationship has played out in a specific way as we saw home prices rise rapidly during the ‘unicorn’ years, leading to significant equity boosts. However, it’s crucial to understand how home values impact homeowners before jumping to conclusions and making any decisions based on reports.
The market had to moderate at some point, and that’s what we saw last fall and winter. Home values slightly dropped, and as a result, homeowner equity also dropped. According to a recent report from CoreLogic, equity decreased 0.7% in the last year. While that might sound alarming, it’s essential to note that the headlines reporting on this change aren’t painting the whole picture. Despite the data showing a drop in equity, homeowners still have near-record amounts of equity. The graph below illustrates the total amount of tappable equity in this country going back to 2005.
As the graph displays, there was a considerable equity boost during the ‘unicorn’ years as home prices appreciated rapidly. However, even during the supposed equity drop, homeowners still had a vast amount of tappable equity available. Home equity is an asset for homeowners, allowing them to tap into their home’s value and fund other purchases. It’s tempting to panic when hearing about a drop in equity, but this doesn’t mean the end of your financial security.
Equity was impacted as home prices decreased slightly in the second half of 2022. According to CoreLogic’s most recent report, homeowner equity declined over the previous year by -0.7%. While equity changes aren’t usually within an individual’s control, understanding the relationship between home values and equity is crucial. The current housing market conditions can help put some of these changes in perspective. Home prices are currently predicted to rise throughout 2021, which means equity will grow, and so will your home’s worth. If you’re looking to buy a home, it’s important to understand how the current market conditions can affect your future equity. (see the pink in the graph below).
But it’s important to realize that despite a slight decline, overall homeowner equity is still significantly higher than it was prior to the so-called “unicorn” years.
There is additional good news. According to recent reports on housing prices, the worst housing price declines are behind us, and prices have already begun to rise. As Chief Economist at CoreLogic Selma Hepp explains:
“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 part of this quote is particularly important and is the one piece of the puzzle that the news was missing. Analysts expect home prices to rise at a moderate pace next year to further underline the positive trends we are seeing. In the same report, Hepp explains:
“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.”
Odeta Kushi, Deputy Chief Economist at First American, also confirms that homeowners currently have a lot of equity even though she uses a slightly different figure:
“Homeowners today have an average of $302,000 in equity in their homes.”
As a result, if you’ve owned your home for a while, you probably still have a lot more equity than you did prior to the so-called “unicorn” years. Furthermore, if you’ve only had your house for a year or less, the forecast for more typical price growth over the coming year should indicate that your equity has already started to increase.
In conclusion, understanding homeowner equity and the relationship between home values and equity is essential. It’s easy to panic when hearing about an equity drop, but it’s important to realize that equity is an asset and that market conditions can impact its value. While we did see a slight dip in equity last year due to home price depreciation, homeowners still have near-record amounts of equity available. By understanding how equity works, homeowners, and potential homebuyers can make informed decisions about their financial future.
