A Drop in Equity Doesn’t Mean Low Equity

<article class="post-716336 post type-post status-publish format-standard has-post-thumbnail hentry" id="post-716336"><span class="entry-date">June 14, 2023</span><div class="entry-header center-block text-center"><h1 class="entry-title">A Drop in Equity Doesn’t Mean Low Equity</h1><div class="shareBlock"><div class="shareTitle">Share</div><div class="shareIcons"><a aria-label="Twitter Share Link" class="twitter solid display-inline-block" data-tracking="Post,Social Post Link Clicked,Twitter" href="http://twitter.com/share?text=A+Drop+in+Equity+Doesn%E2%80%99t+Mean+Low+Equity&amp;url=https%3A%2F%2Fgilliggroup.com%2Fblog%2Fa-drop-in-equity-doesnt-mean-low-equity%2F" target="_blank"><span class="force-hidden">Twitter</span></a>
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</div></div><div class="post-tax post-category"><span></span><a href="../category/realtor-blog/index.html" rel="tag">Realtor Blog</a></div><div class="post-tax post-post_tag"></div></div><div class="entry-content"><div><img alt="A Drop in Equity Doesn’t Mean Low Equity Simplifying The Market" decoding="async" loading="lazy" src="https://media.agentaprd.com/sites/222/20230614-a-drop-in-equity-doesnt-mean-low-equity.webp" style="display: block; margin-bottom: 5px; clear: both; max-width: 100%;" width="358"/>
<p>You may see media coverage talking about a drop in homeowner equity. What’s important to understand is that equity is tied closely to home values. So, when home prices appreciate, you can expect equity to grow. And when home prices decline, equity does too. Here’s how this has played out recently. </p>
<p>Home prices rose rapidly during the <a href="https://www.simplifyingthemarket.com/2023/06/09/why-you-cant-compare-now-to-the-unicorn-years-of-the-housing-market-infographic/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" style="color: blue;" target="_blank">‘unicorn’ years</a>. That gave homeowners a considerable equity boost. But those ‘unicorn’ years couldn’t last forever. The market had to moderate at some point, and that’s what we saw last fall and winter. </p>
<p>As home prices dropped slightly in the back half of 2022, equity was impacted. Based on the most recent <a href="https://www.corelogic.com/intelligence/homeowner-equity-insights-q1-2023/" rel="noopener noreferrer" style="color: blue;" target="_blank">report</a> from <em>CoreLogic</em>, there was a 0.7% dip in homeowner equity over the last year. However, the headlines reporting on that change aren’t painting the whole picture. The reality is, while <a href="https://www.simplifyingthemarket.com/2023/06/12/are-home-prices-going-up-or-down-that-depends/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" style="color: blue;" target="_blank">home price depreciation</a> during the second half of last year caused equity to drop,<strong> the data shows homeowners still have near record amounts of equity</strong>. </p>
<p>The graph below helps <a href="https://www.blackknightinc.com/wp-content/uploads/2023/04/BKI_MM_FEB2023_Report.pdf" rel="noopener noreferrer" style="color: blue;" target="_blank">illustrate</a> 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 <a href="https://www.simplifyingthemarket.com/2023/05/30/todays-real-estate-market-the-unicorns-have-galloped-off/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" style="color: blue;" target="_blank">‘unicorn’ years</a> as home prices rapidly appreciated (<em>see the pink in the graph below</em>).</p>
<p><strong>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.</strong></p>
<p><a href="https://www.simplifyingthemarket.com/content/images/20230613/20230614-tappable-equity-still-near-all-time-highs.png?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" target="_blank"><img decoding="async" src="https://files.keepingcurrentmatters.com/content/images/20230613/20230614-tappable-equity-still-near-all-time-highs.png"/></a></p>
<p>And there’s more good news. Recent home price reports show the <a href="https://www.simplifyingthemarket.com/2023/06/05/oops-home-prices-didnt-crash-after-all/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" style="color: blue;" target="_blank">worst home price declines</a> are behind us, and prices have started to <a href="https://www.simplifyingthemarket.com/2023/05/16/the-worst-home-price-declines-are-behind-us/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" style="color: blue;" target="_blank">go up</a> again. As Selma Hepp, Chief Economist at <em>CoreLogic</em>, <a href="https://www.corelogic.com/intelligence/homeowner-equity-insights-q1-2023/" rel="noopener noreferrer" style="color: blue;" target="_blank">explains</a>:</p>
<blockquote><p><em>“Home equity trends closely follow home price changes. As a result, while the average amount of equity declined from a year ago, </em><strong><em>it increased from the fourth quarter of 2022, as monthly home prices growth accelerated in early 2023</em></strong><em>.”</em> </p></blockquote>
<p>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:</p>
<blockquote><p><em>“</em><strong><em>The average U.S. homeowner now has more than $274,000 in equity – up significantly from $182,000 before the pandemic. </em></strong><em>Also, while homeowners in some areas of the country who bought a property last spring have no equity as a result of price losses, </em><strong><em>forecasted home price appreciation over the next year should help many borrowers regain some of that lost equity</em></strong><em>.”</em></p></blockquote>
<p>And even though Odeta Kushi, Deputy Chief Economist at <em>First American</em>, references a slightly different number, Kushi further <a href="https://twitter.com/odetakushi/status/1667305612298842115" rel="noopener noreferrer" style="color: blue;" target="_blank">validates</a> the fact that homeowners have a lot of equity right now: </p>
<blockquote><p><em>“Homeowners today have an average of $302,000 in equity in their homes.”</em></p></blockquote>
<p>That means if you’ve owned your home for a few years, you likely still have way more <a href="https://www.simplifyingthemarket.com/2023/05/15/homeowners-have-incredible-equity-to-leverage-right-now/?a=712984-fa409495d5d70154d03a25e81e9540e2" rel="noopener noreferrer" style="color: blue;" target="_blank">equity</a> 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 the way back up.</p>
<h3>Bottom Line</h3>
<p>Context is everything when looking at headlines. While homeowner equity dropped some from last year, it’s still near <a href="https://www.simplifyingthemarket.com/2023/06/08/this-real-estate-market-is-the-strongest-of-our-lifetime/" rel="noopener noreferrer" style="color: blue;" target="_blank">all-time highs</a>. Reach out to a trusted real estate <a href="https://www.simplifyingthemarket.com/2023/05/22/why-buyers-need-an-expert-agent-by-their-side/" rel="noopener noreferrer" style="color: blue;" target="_blank">professional</a> so you can get the answers you deserve from an expert who’s there to help as you plan your <a href="https://www.simplifyingthemarket.com/2023/06/02/reasons-to-own-your-home-infographic/" rel="noopener noreferrer" style="color: blue;" target="_blank">move</a> this year.</p>
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