What’s Happening to Your Home Equity in a Cooling Housing Market?

At HomeLight, our vision is a world where every real estate transaction is simple, certain, and satisfying. Therefore, we promote strict editorial integrity in each of our posts.

The housing market is cooling, and you’re likely curious about how that’s affecting your home equity standing. While there are fewer homebuyers due to higher interest rates, the supply of homes remains tight, and that keeps home prices from falling too quickly. In fact, even though existing-home sales dropped 17.8% from 2021 to 2022, the December 2022 median existing-home sales price actually climbed 2.3% from the previous year.

According to the National Association of Realtors (NAR), home prices rose in all regions of the country, marking 130 consecutive months of year-over-year increases, the longest-running streak on record.

“Home prices nationwide are still positive, though mildly,” Lawrence Yun, NAR chief economist, said in a Jan. 20, 2023, news release, adding that he expects “sales to pick up again soon since mortgage rates have markedly declined after peaking late last year.” However, this could vary depending on your specific market.

We asked two experts to help get to the bottom of what’s happening to home equity in the current housing market:

  1. Donald J. Martin, SCRP, RAA, GAA, CDEI, who has been chief appraiser at Martin Appraisals in the Chicagoland area for 46 years.
  2. Dustin Parker, a top-selling agent who works with over 81% more single-family homes than the average agent in the Millsboro, Delaware area.

In this article, we look at some of the most pressing home equity questions homeowners have about the current housing market and lay out answers from the experts.

How Much Is Your Home Worth Now?

Get a near-instant home value estimate from HomeLight for free. Our tool analyzes the records of recently sold homes near you, your home’s last sale price, and other market trends to provide a preliminary range of value in under two minutes.

What is home equity?

Home equity is the amount of your home’s value that belongs to you. In other words, it’s the amount of your home’s value minus any loans, mortgages, or other liens that are attached to your home.

Equity can come from paying down your mortgage loan, gains from home appreciation, or adding upgrades that increase the value of your property.

So if your home is worth $400,000, and you have $320,000 left in unpaid principal on your mortgage loan, that means you hold $80,000 equity in your home or 20%.

How do I calculate my home equity?

To calculate your home equity, you need to know three things:

  1. Your home’s current value
  2. The principal balance you still owe on your mortgage
  3. Additional liens or property loans you still need to pay

From there, you can roughly calculate your home equity by using this simple equation:

Your Home’s Value – (Total Amount of Liens + Principle Balance) = Your Home Equity

It’s important to note that banks use additional calculations for the purposes of home equity loans, refinances, and lines of credit. We’ll look at options to unlock your home’s equity later in this post.

What caused the recent home equity high?

Home equity soared throughout the last two years. According to Black Knight, the total amount of home equity in the U.S. broke back-to-back records in 2020 and 2021 – surging 35% in 2021.

Martin says the seeds of the housing boom of the last few years were planted during the last housing crash and Great Recession that followed.

“People were very scared,” he explains. “There was a period of years where people were not buying. We had pent-up demand occurring, where people could afford to buy a home but were holding off.”

He says that when employment bounced back, and interest rates continued to hit lows, it unleashed that pent-up demand for housing.

“With the low interest rates and the housing market being at an affordable level, it begins to fuel this engine,” he says.

That engine, sparked also by additional factors such as inflation, a rise in remote work, and housing inventory shortages, pushed housing prices upward. Ultimately, housing prices jumped 45% from the winter of 2019 to June of 2022 – hitting all-time highs.

What’s occurring in the housing market now?

To understand what’s happening with your home’s equity, it’s worth digging into current housing market trends. Here are some patterns we’re seeing in this cooling housing market:

  • Home appreciation is slowing.
  • Mortgage rates are higher.
  • Home sales are decreasing.
  • Average days on market are increasing.
  • The market is becoming less competitive.
  • Homebuyers are gaining an edge.
  • Home sellers are adjusting their expectations.

What’s happening to home values and home equity?

Home appreciation climbed rapidly in 2021, but home values have crawled lower since then. And a once red-hot housing market appears to be cooling quickly. According to HomeLight’s Top Agent Insights for New Year 2023 report:

  • 98% of agents say bidding wars were either non-existent or decreasing in 2022’s Q4
  • 95% of agents say the average days on market for their area’s local listings are increasing
  • 30% of agents now classify their local market as a seller’s market – down 65% from Q4 of 2022

Martin says he’s already seeing that dropoff in demand pushing home prices lower.

“The properties are on the market for a longer period of time, and in some cases, price reductions are beginning to occur,” he says. “I would say a reasonable estimate of what’s going on in the marketplace is that overall, there’s a two percent drop.”

Data from some housing sources echo Martin’s estimates. According to Federal Reserve Bank of St. Louis (FRED) economic data, the Median Sales Price of Existing Homes in November of 2022 inched down to $370,700. That’s a 2% decrease from the month prior and a 10% drop from June’s highs. Data from other sources indicate flat or mild price increases, depending on the market.

What’s tilting the housing market scale?

Home values, and your home equity, are tied to housing demand. And home sales are slowing down. According to a NAR report, existing home sales dove by 34%, YoY in December 2022. Here are a few factors that are weakening demand, and can cause home equity values to slip:

Rising interest rates
Mortgage rates have spiked in the last year. According to FRED, the 30-Year Fixed Rate Mortgage Average climbed from 2.66% to 6.33% in January of 2023. As Martin explains, many potential buyers can’t afford to pay that higher mortgage rate.

“We do know from past experience, as interest rates rise, it makes homes less affordable and tends to have a negative impact on value,” he says.

High inflation has forced many potential home buyers to spend their extra cash on expensive everyday items. That could be causing individuals to think twice about buying a new home.

Recession fears
Parker says he’s seeing many people shy away from home transactions because they’re concerned the economy will sour – and leave them unable to make payments.

“We’re also hearing from a lot of buyers and sellers who have generally a lot of fear around the economy right now,” he says. “I think fear is a big part of it, and uncertainty – not knowing what’s coming for the year ahead.”

What is a good home equity amount?

If you’re considering selling your home, you may be wondering if you have the right amount of equity. Industry experts say that a good equity level depends on your individual situation.

Overall, if you want to keep up with the average U.S. homeowner, you’ll need to secure a relatively large hunk of equity. As a whole, U.S. homeowners hold a record amount of equity. According to ATTOM, a leading real estate data company, 48.5% of mortgaged homeowners owed just 50% or less on their homes in Q3 of 2022.

In order to qualify for most refinancing programs, you’ll want to accrue at least 20% equity in your home.

Martin says the only way to know if you have enough equity to sell is to dig into your individual situation. However, he suggests asking yourself two important questions before selling:

  • Can you afford to buy another home?
  • What does your fuller debt portfolio look like?

He also says to keep an eye on your home’s value as the housing market shifts.

“As values fall, that equity is going to shrink,” he says. “Will they continue to fall? We think that they will continue to fall throughout this year, but we don’t have a crystal ball.”

How do I know when my home reaches 20% equity?

Since your equity levels can shift when your home’s value changes, it’s not easy to pin down an exact equity figure without hiring an appraiser. Even then, the appraisal will represent the value at that point in time, and can still fluctuate.

“I would tell them that they need an appraisal to figure that out,” says Martin. “We aren’t going to know what that is until we know the market value of their home.”

Still, if you aren’t ready for an appraisal and want an estimate of your home’s value, you have a few options:

  • Online tools: You can use online calculators, such as HomeLight’s Home Value Estimator, to see a quick ballpark estimate of what your home could be worth.
  • Real estate agents: You can hire an agent to run a comparative market analysis (CMA) on your home. This is a process where an agent compiles research about your home and the local market in order to determine its potential price range.

Should I sell my house if I have a lot of equity?

If you’re sitting on a pile of equity and see home values creeping lower, you may think it’s a no-brainer to sell your house. In some cases, it may be a smart move. However, Martin says to remember you’ll probably need to buy a new house once your current one sells – and you may be left paying a much higher mortgage.

If you do decide to sell your home to cash in on equity, Martin says to make sure you’re on sound financial footing and able to afford potentially higher mortgage payments.

“The best way to buy another home is to make sure all of that personal credit is paid off, and sit down with a loan officer,” he says.

The only reason we would recommend refinancing right now is if they got an interest rate at the peak, over the summer, where we’ve gotten up a little bit above 7% for a period of time. Even at that, it probably only makes sense if they’re planning to be in that home for another four to seven years at least.
  • Dustin Parker
    Dustin Parker Real Estate Agent
    Dustin Parker
    Dustin Parker Real Estate Agent at The Parker Group
    Currently accepting new clients
    • Years of Experience 9
    • Transactions 1170
    • Average Price Point $287k
    • Single Family Homes 1038

Is this a good or bad time to refinance?

If you’re thinking about refinancing, you may wonder if you’ll lose equity. In short, you don’t lose equity from refinancing unless you increase your mortgage balance by taking cash (equity) out over and above your current mortgage amount.

However, since mortgage rates have been climbing of late, Parker says he doesn’t suggest refinancing right now in most cases.

“The only reason we would recommend refinancing right now is if they got an interest rate at the peak, over the summer, where we’ve gotten up a little bit above 7% for a period of time,” he explains. “Even at that, it probably only makes sense if they’re planning to be in that home for another four to seven years at least.”

What are my options to unlock my home’s equity?

No matter what direction the housing market is moving in, you may need to pull cash out of your home’s equity. Here are a few ways to tap into your home’s equity:

  • Cash-out refinances: With cash-out refinance transactions, you apply for a fresh loan that’s bigger than your current mortgage. Then you can pay off your mortgage and use that additional amount of cash for other uses. However, your new rate will rely on current interest rates, so realize this option could be costly if you have to jump to a new, higher mortgage rate.
  • Home equity loans: When you choose a home equity loan, you provide your home’s equity as collateral to the lender. In return, you receive a new loan, usually at a new fixed rate, that you can use to pay for other things in your life. With these loans, you’re paid a lump sum of money. This is usually a second mortgage.
  • Home Equity Lines of Credit: Home Equity Lines of Credit (HELOC) are similar to home equity loans, but instead of receiving a lump sum of money, you can pull out money as credit in different withdrawal amounts. HELOCs also usually feature variable interest rates. These loans are typically considered another type of second mortgage.

If you want to learn more about the pros and cons of these home equity options, read this HomeLight story: “Options to Unlock Your Home Equity.”

Is this a good time to borrow against my home’s value?

If you’re considering borrowing against your home’s value in the current market, Martin says to remember that falling home values could cause that equity to dry up faster than you expect.

“If market values continue to drop, that will make that equity disappear,” he cautions.

Still, if you’re using your home’s equity to pay off high-interest debt or give yourself a long-term financial advantage, it may be worth it to borrow against your home’s equity. In all cases, Martin suggests borrowing only what you need and consulting a financial expert before you take out any major loans.

“In most cases, it would probably be advantageous to only borrow what you need to,” he says.

Modest home value declines don’t need to trigger alarm bells

Home equity may be sliding from its recent peaks, but that doesn’t mean homeowners need to panic. Although higher interest rates will likely curb housing demand, and that could dampen home prices, the experts don’t expect a major home equity crash like the 2008 downturn. And if you do decide to pull equity out of your home, you have several options to choose from.

Overall, by keeping an eye on home values, monitoring interest rates, consulting with a financial expert, and considering all of your options, you should be in a solid position to manage your home’s equity – even if housing values continue to cool off.

Header Image Source: (iriana88w / Depositphotos)