Home Equity Trends
There was a historic run-up in home prices during the pandemic. Naturally, this increased home equity as well. US homeowners’ equity collectively peaked at $17.6 trillion last May.
But a sharp rise in mortgage rates is quickly reversing this two-year bull market. Since May, about $1.5 trillion in home equity has vanished, according to data from the mortgage analytics firm Black Knight (BKI). On average, most borrowers have lost $30,000 in equity over the same period.
These dramatic rise-and-fall markets can spell trouble for new homeowners.
Wait – What Is Equity Again?
The “equity” in your home is the difference between your home’s value and your mortgage.
For example, let’s say you buy a $400,000 home by putting down 5% and taking out a $380,000 mortgage for the rest. Your equity would be $400,000 minus $380,000, so, $20,000. Home equity is an important metric when it comes to refinancing, selling, or taking out a loan against your home (such as a HELOC).
It’s important to remember that, a home constantly fluctuates in value, the mortgage that you take out stays the same. Borrowers who took out mortgages at the top of that market in May, only for their homes to have decreased in value since then, might have an “underwater mortgage.” In other words, they might owe $400,000 on a home that’s now only worth $380,000.
There were a lot of factors at play during the pandemic that made it easier for people to buy homes.
For example, stimulus checks and halted student loan payments made it easier to save for a down payment, while record-low interest rates made the cost of borrowing more affordable. This appeared particularly true for Black and Latino communities – homeownership rates within those populations jumped from 2019 to 2021.
However, looking forward, if you own a home, be sure you’re not overleveraged. Home appreciation is often a perk of homeownership, but not always a guarantee. Homeowners surely hope the US housing market recovers fully. But, in the meantime, it’s key to keep an eye on your equity.
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