Home Equity

There is a buzz about home equity decline and that must have got you worried.

Let’s first understand what is equity?

Your home’s equity is the difference between how much your home is worth i.e. the current market value and how much you owe on your mortgage.

Thus, it is important to understand that equity is tied closely to home values. So, when home prices appreciate, you can expect equity to grow since the difference between the market value and your balance mortgage gets wider and similarly when home prices decline, equity does too since the differential amount shrinks. Here’s how this has played out recently.

Home prices accentuated rapidly during the ‘unicorn’ years. That gave homeowners a considerable equity boost as the difference got wider. But those ‘unicorn’ years couldn’t last forever, which is but normal. We saw the market moderation since last fall .

Since we experienced home price drop in the later quarters of 2022, equity was impacted. Based on the most recent report from CoreLogic, there was a 0.7% dip in homeowner equity over the last year. However, as it is said don’t judge a book by it’s cover similarly the dip in equity doesn’t show up the actual story. The reality is, while home price depreciation during the later half of last year caused equity to drop, the data shows homeowners still have near record amounts of equity.

Let’s understand what is tappable equity to understand how this equity dip has affected. Tappable equity is the amount of equity available for homeowners to access before hitting a maximum 80% loan-to-value ratio (LTV). As we know that there was a significant equity boost during the ‘unicorn’ years as home prices rapidly appreciated but we need to check from the table below that even though there is a dip in the home prices compared to the unicorn years but the homeowner equity is still much higher than it was prior to Unicorn Years. Because we are focussing on the dip in equity compared to Unicorn years we are getting worried.

The brighter side is recent home price reports show the worst home price declines are behind us, and prices have started to go up again.

As Selma Hepp, Chief Economist at CoreLogic, 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.”

Hence, based on the above report we can say that the home price acceleration has started and will continue to grow at a normal rate.

In the same report, Hepp puts it this way:

“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.”

That means if you’ve owned your home for a few years now, you are likely still have way more equity than you did before the ‘unicorn’ years. And if you’ve owned your home for a year or less, the forecast for more typical price appreciation over the next year should mean your equity is already on it’s appreciation way.

Thus, even if the buzz is all about home price drop, dip in equity but it is still higher than it used to be prior to unicorn years.