Home equity gains are slowing

By the end of the third quarter, mortgage borrowers had gained an average of $34,300 in home equity compared to the year before, but the growth was smaller than the increases recorded during the hot summer housing market, CoreLogic found.

The 63% of U.S. homeowners with a mortgage saw their home equity rise 15.8% for a collective gain of $2.2 trillion since the third quarter last year, according to the firm’s Homeowner Equity Report released Friday. The positive movement, however, was almost half of homeowners’ year-over-year home equity gains in the second quarter of nearly $60,000.

“Weakening housing demand and the resulting decline in home prices since the spring’s peak reduced annual home equity gains and pushed an additional number of properties underwater in the third quarter,” said Selma Hepp, interim lead of the Office of the Chief Economist at CoreLogic, in a press release.

Annual home price growth soared over the summer but has since cooled to 10.1% year-over-year in October and could trend into negative territory by next spring. Waning values caused 43,000 properties to fall underwater in the third quarter, according to CoreLogic. The number of mortgaged homes with negative equity jumped 4% from the prior quarter to 1.1 million homes, or 1.9% of all mortgaged properties in the third quarter. 

Despite the increase, the number of homes in negative equity fell by 9.8% from the same time last year when 1.2 million homes, or 2.2% of all mortgaged properties, were in negative equity in the third quarter of 2021.

Home price changes of just 5% could shift the position of hundreds of thousands of borrowers, CoreLogic said. If values rose 5%, 127,000 homes would regain equity, while if they declined 5%, 172,000 more homes would fall underwater, according to CoreLogic. Homeowners weathering the market’s latest swings however remain in a better position than borrowers during the Great Financial Crisis, Hepp said. 

“At 43.6%, the average U.S. loan-to-value (LTV) ratio is only slightly higher than in the past two quarters and still significantly lower than the 71.3% LTV seen moving into the Great Recession in the first quarter of 2010,” she said.

Massive home equity gains through the year drove interest in home equity lines of credit. But the market’s overall slowdown has cost borrowers billions of dollars; homes lost 7.6% of their equity in the third quarter, the biggest dropoff on a percentage basis since 2009, according to a Black Knight analysis.