Home Equity Is On The Decline — What It Could Mean For You

As if the rising cost of real estate and a significant uptick in interest rates weren’t enough, there’s another troubling trend impacting homeowners currently paying off their mortgages.

For the first time since 2012, equity is on the decline. As of the latest reports available, it’s dropped by nearly 2% since the same point last year.

Understanding the implications

Equity is basically just the difference between how much a home is worth and how much its owner still owes on it. A bigger down payment can establish equity upfront and making those monthly payments will increase equity over time … which is a good thing.

The last time equity began to slip was in the wake of the Great Recession, which was fueled in large part by a housing market bubble that burst a few years earlier.

Since the value of a home is one part of how equity is calculated, falling prices are a big part of the problem. The typical house still costs significantly more than it did prior to the pandemic, but those prices have started to moderate a bit in recent months.

Bound by “golden handcuffs”

A combination of factors has led many homeowners to stay where they are instead of buying another home. This has fueled a trajectory by which existing home sales are down by more than 3% — the biggest year-over-year drop since 2011.

Instead of paying more for another house and getting a new mortgage with a higher interest rate, more and more homeowners are hunkering down and remaining tied to their current residences.

Mortgage Banker’s Association executive Edward Seiler explained that those who “were lucky enough to get a 2.75% interest rate in 2022 are in a great position” while would-be first-time homeowners are facing “a very daunting proposition.”

Chris Agee June 23rd, 2023

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