Residential real estate, including the home you live in, is an important component of the U.S. economy. The value of residential real estate minus the loans against it is one measure of economic health and has an influence on other parts of the economy. The 2007-2009 financial crisis was driven in part by a housing bubble and overvalued residential real estate.
Just as you care about how much equity you have in your home, economists and analysts trying to make sense of the economy are equally interested in broader trends in home values and equity.
Home Equity and Economic Health
Home equity is the value of your ownership in your house. It is the market value of your real estate holdings less the amount of any loans against the property.
Your home equity may change based on local real estate values, improvements that you make to your house, and the amount of principal remaining on your mortgage, among other factors.
For most, their home is their largest single purchase they will make in their life. The Federal Reserve Bank reports that at the end of 2021, American households held a total of $38.11 trillion in real estate, representing almost 27% of total household wealth. The real estate was financed with $11.75 trillion in mortgages.
Residential real estate is a popular asset class because it is not only an investment vehicle that provides a return, but it also provides utility allowing the owners to live in the home while they pay it off (and as it appreciates). They can then live mortgage- and rent-free in retirement or downsize to a less-expensive place, using any extra money to help fund living expenses. Homes are also what is known as a leveraged investment, in short while you may only put 5% down on the home, your investment appreciates based on the home’s full value. That is on a $350,000 home a buyer might put 5%, $17,500 down. Now if local values appreciate at 4% in the first year, the home would appreciate to $364,000, providing a $14,000 return on the buyers $17,500 investment, an 80% return on investment!
A home, and the amount of home equity you possess is an important component of your overall financial health. When aggregated across the regional and national economies, it is an indicator of economic health or problems. It is included in GDP, and it also is tracked on its own.
The Relationship Between the Economy and Home Values
The economy affects how much equity you have in your home. The S&P/Case-Shiller U.S. National Home Price Index shows how the prices of residential real estate have moved over time. The index is set with prices as of January 2000 at 100. It hit a peak of 184.6 in July 2006, an 84.6% increase from January of 2000. Prices started declining during the Great Recession and finally bottomed out in February 2012. The index reached 300.9 in April 2022 after a steady climb during the pandemic.
The relationship works in an inverse way. Real estate values affect other parts of the economy, including employment, retail sales, and commercial construction. When home equity increases, consumers feel more comfortable making purchases, whether or not they use a home equity line of credit for financing those purchases. Some use their home equity to finance purchases or home improvements. Others use their increased equity as justification to spend more earned income, which is known as the “wealth effect.”
Economic Factors That Affect Equity
As discussed, the status of various factors that shape the economy has a direct influence on home resale values and equity. Although the correlation can be inverse, it’s important to understand how that impact works. Here are some specific aspects of the economy that can help or hurt the value of your home equity.
Demographics
The single greatest factor affecting home equity is an increase in housing prices, according to CoreLogic, a firm that specializes in data for the real estate industry. The Federal Home Loan Mortgage Corp., or Freddie Mac, reports that over the long term, the biggest driver for housing values is demographic-driven supply and demand. When more people seek to purchase a home, demand rises and prices go up. This can be the result of population growth including more people moving into an area for employment, such as is currently occurring here in Columbus in response to employers such as Intel, Facebook, Google, Amazon and others expanding here, or because the local population is weighted toward young families with children, such as is the case here in Central Ohio.
Personal Income
Personal income can affect how much equity you have in your home as an increase in how much you earn can allow you to pay off your home sooner or to make improvements that increase the home’s value increasing your equity.
Across the economy, an increase in personal income makes it easier for more people to afford homes, which drives demand and thus pushes up prices. The National Association of Realtors’ Housing Affordability Index looks at the ability of a family with the median income to afford the median house. While housing affordability has declined over the past two years in response to both higher home prices, and mortgage interest rate, Columbus, and Central Ohio remain highly affordable.
Interest Rates
Higher rates tend to lead to longer-term mortgages (30-year mortgages as opposed to shorter 15-year loans) and thus more time is required to build equity. Higher rates also lead to reduced home affordability, which affects prices and thus equity. On the other hand, the decreased affordability may cause more people to stay in their current homes, thereby building equity by paying off the loan and possibly making improvements while they stay.
Bottom Line
Analysts at CoreLogic report that on average, home equity increased to a record high of $300,000 per homeowner between the second quarter 2021 and the second quarter 2022. U.S. homeowners with mortgages (which account for roughly 63% of all properties) saw equity increase by 27.8% year over year, representing a collective gain of $3.6 trillion, for an average of $60,200 per borrower since the second quarter of 2021.
An increase of that magnitude has many factors propelling it. Home equity affects the economy and, in turn, the economy affects home equity.
For many households, home equity is the only source of wealth creation. Recent record gains in equity and record declines in loan-to-value ratios will provide many owners with a financial buffer in case the U.S. economy goes into a recession.
If you, or someone you know is considering Buying or Selling a Home in Columbus, Ohio please give us a call and we’d be happy to assist you!
The Opland Group Specializes in Real Estate Sales, Luxury Home Sales, Short Sales in; Bexley 43209 Columbus 43201 43206 43214 43215 Delaware 43015 Downtown Dublin 43016 43017 Gahanna 43219 43230 Grandview Heights 43212 Galena 43021 Hilliard 43026 Lewis Center 43035 New Albany 43054 Pickerington 43147 Polaris Powell 43065 Upper Arlington 43220 43221 Westerville 43081 43082 Worthington 43235
