Home Equity Wealth Makes a Comeback

Home prices have risen significantly throughout the nation since the trough in the housing cycle.  Through August 2016, the S&P CoreLogic Case-Shiller Home Price Index has recorded a 38 percent rise in the national index since its February 2012 trough, with some areas up more sharply and other markets showing a subdued bounce back.

One outcome of the broad geographic recovery in home values has been a rebuilding of home equity wealth for America’s homeowners.  The difference between the value of one’s home and the amount of mortgage debt on the home is home equity.  If you own your home free and clear of mortgage debt, then the entire value of your home is your home-equity wealth.  However, if you have a mortgage and the value of your home falls, you may have no home equity, or worse:  if the value of your home has fallen below your mortgage debt, then you have negative equity.  As of mid-2016, CoreLogic has estimated that about 3.6 million homeowners had negative equity, or about 7 percent of all homeowners who had a mortgage.

Across the U.S., the value of the housing stock, and the amount of home equity wealth held by homeowners, have risen dramatically during the last five years.  After hitting a trough in June 2011, the value of the nation’s single-family housing stock grew 40 percent by June 2016.  Home equity wealth has more than doubled during that period, rising from $6.1 trillion to $12.7 trillion (Exhibit 1).  By rebuilding this component of household wealth, the recovery in home equity has helped to support consumption spending and renovation expenditures.  While estimates vary, Moody’s Analytics has estimated that for every $100 rise in housing wealth, consumption spending rises roughly $2.[1]  In other words, a $6 trillion rise in housing wealth has lifted consumer spending by more than $100 billion during the last five years.  And renovation expenditures are up as well, further contributing to economic growth.

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To illustrate what this means for the average homeowner, CoreLogic’s data was used to calculate the average gain in home-equity wealth per mortgaged home from mid-2015 to mid-2016.  Nationwide, the average gain in wealth was about $11,000 per homeowner, but with wide geographic variation (Exhibit 2).  California, Oregon and Washington had increases of nearly $30,000 per average owner, while Connecticut, New Jersey, North Dakota and Pennsylvania had no change or experienced a decline.

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Moody’s Analytics has projected that the national S&P CoreLogic Case-Shiller Index will rise another 5 percent in the coming year.  If so, this value rise could boost home-equity wealth by close to $1 trillion.  In turn, this wealth gain should add to consumption spending and contribute to economic growth in 2017.

[1] Mark Zandi, Brian Poi and Scott Hoyt, Wealth Matters (A Lot), Moody’s Analytics, October 2015, p. 8.

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