Rising home prices have been in the news a lot lately, and much of the focus is on whether they’re accelerating too quickly and how sustainable the growth in prices really is. One of the often-overlooked benefits of rising prices, however, is the impact they have on a homeowner’s equity position. Afterall, this is why they bought a home ... besides having a nice place to live.
Home equity is defined as the difference between a home’s fair market value and the outstanding balance of all liens on the property. While homeowners pay down their mortgages, the amount of equity they have in their homes climbs each time the value increases. This doesn't even account for the tax deductions they get (i.e. the money they save on their taxes each year) simply for paying their mortgage.
Today, the number of homeowners that currently have significant equity in their homes is growing. According to the Census Bureau, 38% of all homes in the country are mortgage-free. In a home equity study, ATTOM Data Solutions revealed that of the 54.5 million homes with a mortgage, 26.7% of them have at least 50% equity. That number has been increasing over the last eight years.
CoreLogic also notes:
“…the average homeowner gained approximately $5,300 in equity during the past year.”
The map below shows a breakdown of the increasing equity gain across the country, painting a clear picture that home equity is growing in nearly every state.
This may be the year to take advantage of your home equity by applying it forward, either as you downsize or as you move up to a new home. There are a lot of people deciding to move up to a bigger/newer home while their payments hardly change due to current rates and new builder incentives. This won't last forever though. If deflation does naturally take hold due to the world pandemic. Then the cost of rates could go up and it won't be the price of the home that matters; it'll be the price of the loan that causes less people to move. This is all, of course, determined by how the government reacts. Right now, they are trying to flood the economy with funding to keep deflation from happening.