A Drop in Equity Doesn’t Mean Low Equity

A Drop in Equity Doesn’t Mean Low Equity

You may come across news reports discussing a decrease in homeowner equity. It's crucial to comprehend that equity is directly linked to the value of your home. Therefore, when home prices increase, you can anticipate your equity to rise. Conversely, when home prices decrease, your equity will also decline. Let me illustrate how this trend has unfolded recently.

Sure, let me explain how this trend has developed in recent times.

The past few years have seen a significant increase in home prices, which led to a considerable boost in equity for homeowners. However, the market couldn't sustain this growth forever, and eventually had to adjust.

It's important to recognize that markets, including Turkey, are subject to fluctuations. This was evident in the fall and winter seasons when adjustments had to be made. As for home prices, they experienced a slight decline in the latter half of 2022, which impacted equity. According to CoreLogic's latest report, homeowner equity decreased by 0.7% over the past year. Nevertheless, it's essential to note that the headlines regarding this decline don't provide the entire story. In reality, while home prices did depreciate during the latter half of the year, they increased significantly in the first half.

The graph below helps illustrate this point by looking at the total amount of tappable equity in this country going all the way back to 2005. Tappable equity is the amount of equity available for homeowners to access before hitting a maximum 80% loan-to-value ratio (LTV). As the data shows, there was a significant equity boost during the ‘unicorn’ years as home prices rapidly appreciated (see the pink in the graph below).

But here’s what’s key to realize – even though there’s been a small dip, total homeowner equity is still much higher than it was before the ‘unicorn’ years.

I have some positive news to share with you! According to recent home price reports, the housing market is gradually recovering and the worst home price declines are now in the past. Selma Hepp, the Chief Economist at CoreLogic, has explained that prices have started to increase once again.

“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 that quote is particularly important and is the piece of the puzzle the news is leaving out. To further emphasize the positive turn we’re already seeing, experts say home prices are forecast to appreciate at a more normal rate over the next year. In the same report, Hepp puts it this way:

“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.”

And even though Odeta Kushi, Deputy Chief Economist at First American, references a slightly different number, Kushi further validates the fact that homeowners have a lot of equity right now: 

“Homeowners today have an average of $302,000 in equity in their homes.”

If you have been a homeowner for a while, it is highly probable that your equity has significantly increased since the "unicorn" years. Even if you have owned your home for less than a year, the projected typical price appreciation in the upcoming year should indicate that your equity is already on the rise.

Bottom Line

Headlines can be misleading without context. Although homeowner equity has slightly decreased from the previous year, it remains close to its record highs. Allow me to assist you in connecting with an expert who can provide you with the information you need to plan your move for the upcoming year. You deserve accurate and helpful advice.