Equity's Decline Doesn't Imply Insufficient Equity

Media reports often discuss declines in homeowner equity, but it's crucial to recognize the strong connection between equity and home values. When property prices rise, equity tends to increase as well. Conversely, when property prices fall, equity experiences a decline. Let's examine how this scenario has unfolded recently.

During the period known as the ‘unicorn’ years, there was a significant surge in home prices, resulting in a substantial increase in homeowners' equity. However, it was inevitable for the market to eventually stabilize, which became apparent during the fall and winter seasons.

With a minor decline in home prices during the latter part of 2022, homeowner equity experienced some impact. According to the latest report by CoreLogic, there was a decrease of 0.7% in homeowner equity over the past year. However, it's important to note that the headlines highlighting this change do not provide a comprehensive view of the situation. In reality, despite the depreciation in home prices during the second half of the previous year, the data indicates that homeowners still possess near-record levels of equity.

The following graph provides visual evidence supporting this argument by examining the cumulative tappable equity in the country since 2005. Tappable equity refers to the equity accessible to homeowners before reaching the maximum 80% loan-to-value ratio (LTV). As depicted in the graph, the ‘unicorn’ years witnessed a substantial surge in equity due to rapid appreciation in home prices (indicated by the pink color in the graph).

However, it is crucial to recognize an important fact: despite the slight decline, the overall homeowner equity remains significantly higher compared to the pre-'unicorn' years.

Furthermore, there is additional positive news to consider. Recent reports on home prices indicate that the most severe declines are now in the past, and prices have begun to rise once more. Selma Hepp, Chief Economist at CoreLogic, provides further insight into this development.

"Home equity trends closely align with fluctuations in home prices. Consequently, although the average equity amount experienced a decline compared to the previous year, it has increased since the fourth quarter of 2022, driven by accelerated monthly home price growth in early 2023."

The final portion of that quotation holds particular significance and represents the missing element in the news coverage. To emphasize the optimistic shift that is already underway, experts predict that home prices will appreciate at a more moderate pace in the coming year. Selma Hepp expresses this sentiment in the same report, stating the following:

"The typical homeowner in the United States currently possesses over $274,000 in equity, which represents a substantial increase from the pre-pandemic figure of $182,000. Additionally, although homeowners in certain regions who purchased properties last spring experienced equity losses due to declining prices, the projected appreciation of home prices in the next year is expected to aid many borrowers in recovering a portion of their lost equity."

Although Odeta Kushi, Deputy Chief Economist at First American, presents a slightly different figure, her statement further confirms the substantial amount of equity that homeowners currently possess.

"Presently, homeowners have an average equity of $302,000 in their homes."

Consequently, if you have been a homeowner for a few years, it is highly probable that your equity surpasses the levels preceding the 'unicorn' years. Moreover, if you have owned your home for a year or less, the projected return to normal price appreciation within the next year implies that your equity is already in the process of rebounding.

Bottom Line

When examining headlines, it is crucial to consider the context. Although homeowner equity has experienced a minor decline from the previous year, it remains close to its highest levels ever recorded. To obtain the answers and guidance you deserve while strategizing your move this year, it is advisable to reach out to a reliable real estate professional who can provide expert assistance.