When it comes to equity, many homeowners are ‘rich’
Buyers and sellers might be struggling to navigate the market, but homeowners are well-positioned to ride out the downturn.
Key points:
- Nearly half of American homeowners with mortgages are considered “equity rich,” meaning their loan balance is no more than 50% of the market value of the house.
- Only 1 in 35 mortgages was considered underwater in the third quarter.
- This equity cushion reduces the likelihood of a negative-equity crisis, such as the one seen during the Great Recession.
While the slowdown in the real estate market has some concerned about what's next, many homeowners are in relatively good shape because they have so much equity built up in their home.
A new report from ATTOM found that 48.5% of homeowners in the United States with mortgages were considered equity-rich in the third quarter, meaning that their combined estimated loan balances were no more than 50% of their home's estimated market value. That's up from 39.5% in the third quarter of 2021.
The report also found that just 1 in every 35 mortgages — less than 3% of all mortgages — was considered underwater in the third quarter, meaning that the homeowner owed more on the loan than the value of the house.
Being in an equity-rich situation gives homeowners more options if they become financially distressed. They could still sell their home at a profit rather than losing their equity to a foreclosure sale, something that happened to many during the peak of the Great Recession when nearly a third of all homeowners were underwater on their loans, said Rick Sharga, executive vice president of market intelligence at ATTOM.
Equity-rich homeowners also have an opportunity to tap into their equity via a home equity line of credit (HELOC) if needed.
"At the moment, there's no data that suggests that borrowers are tapping into HELOCs in order to defray living expenses," Sharga said in an email. But with high inflation, "it's possible that a number of households find themselves 'house rich and cash poor,' and may, at some point, need to use something beyond their monthly income to help make ends meet. While not a great use of a HELOC, having this temporary cushion might be better than running up balances on higher rate credit cards for some households."
Sharga expects the use of HELOCs to increase in the coming months. Along with using a line of credit as a temporary cushion, some homeowners might see this as a good time to do home improvements rather than sell.
Home prices are expected to continue dropping for at least the near term, but Sharga said it would have to be a significant year-over-year drop to really start eating into home equity. He noted some markets posted 40-50% jumps in values over the past two years, so a 5-10% decline wouldn't have a big impact on equity.
"Markets where growth wasn't as strong — possibly in the Midwest, for example — might feel a bit of a hit if values dropped that much," Sharga said.
Homeowners most likely to be impacted by a drop of 10% or more would include first-time buyers who purchased in the past year, homeowners who contributed a low down payment, and those who are in financial distress and need more equity than they have.
Regionally, the Western U.S. had the highest number of states with equity-rich properties, with six of the top 10 states located in that region, according to the report. The top three states overall were Vermont (75.9% of mortgaged homes were equity-rich), Idaho (65.8%) and Arizona (63.4%).
Nine of the 10 states with the lowest percentages of equity-rich properties in the third quarter of 2022 were in the Midwest and South, led by Louisiana (24.5%) — which also had the highest percentage of "seriously underwater" homes — Illinois (26.3%) and Alaska (26.7%).