Year over year home prices have been rising in almost all areas of the country for much of the past 10 years. While the conversation about rising home prices is often centered around affordability for homebuyers, the flip side of the coin is that rising prices have also created tremendous equity for home sellers.

One of the best ways to invest in your financial future, especially as home equity grows, is through homeownership. Home equity can be viewed as a form of forced savings that works to your advantage as home values appreciate. Rising home equity provides homeowners with options in two unique ways - it acts as a safety net for those struggling to pay their mortgage in the current economy while creating opportunities for others to update, or upgrade, their current home. Watch the following video, or continue reading below, to learn more.

Home equity was growing across the country before the current health crisis and has continued to grow throughout the year. According to the just-released Q2 Homeowner Equity Insights Report by CoreLogic:

“US homeowners with mortgages (roughly 63% of all properties) have seen their equity increase by a total of $620 billion since the second quarter of 2019, an increase of 6.6%, year over year.”

The Chief Economist for CoreLogic, Dr. Frank Nothaft, attributes much of the equity growth to rising home prices:

“The CoreLogic Home Price Index registered a 4.3% annual rise in prices through June, which supported an increase in home equity.”

CoreLogic also indicated that home equity is increasing in every state across the country as shown on the following map:

“In the second quarter of 2020, the average homeowner gained approximately $9,800 in equity during the past year.”

When you look at the equity gains of homeowners cumulatively over the past decade you find that the vast majority of homeowners are currently sitting on substantially more equity than they might realize.

What Does This Mean for Homeowners?

For Homeowners Facing Uncertainty

There has been much speculation that the economic downturn caused by the pandemic, and the resulting unemployment, would spell trouble for the housing market as there was bound to be a wave of new foreclosures.

While there will certainly be more foreclosures than we have seen the past few years (foreclosures happen every year in all market conditions) I don’t foresee a wave of foreclosures or distressed properties coming on the market. Why? Homeowner Equity……..

Many struggling homeowners have entered into mortgage forbearance programs with their lender. In a traditional forbearance the homeowner is allowed to skip payments for 3 to 6 months, without penalty., and the missed payments are then scheduled to be paid back in a lump sum. That solution obviously won’t work for someone without a job. They are unlikely to be in a position to pay back that entire amount in a lump sum. Many jumped to the conclusion that not being able to pay back those missed payments all at once would lead to a foreclosure. To be clear, lenders don’t want that. Lenders are in the business of lending money, not owning homes. A number of details about forbearance and the pandemic needed to be worked out because what isn’t widely known is that when you don’t make your mortgage payment, your mortgage company still has to make the payment to the mortgage investor that owns the loan. Much like when a renter doesn’t pay the rent that doesn’t mean the landlord doesn’t have to make the mortgage payment. Over the past few months, many of the forbearance programs have been modified to allow the missed payments to be made up over time or added to the end of the loan. One of the things that has made this option viable is equity. The equity means that the lenders long term position is still protected.

During the housing market meltdown, in an effort to stem the tide of foreclosures, lenders began pushing short sales. Again, for lenders, owning the property is the absolute last resort. In a “short sale”, just as the name implies, it means that the proceeds from the sale of the home will not be enough to cover closing costs and the outstanding mortgage balance. Hence, the proceeds would come up “short”. The rise in equity over the past decade has eliminated that situation for the vast majority of homeowners in the country. If someone was truly in a position where all options had been exhausted and the home could not be kept, why would someone with equity just allow a home to go to foreclosure and leave that money on the table? It doesn’t make any sense. Especially under current market conditions, the home could be sold, all obligations paid off, and most likely there would still be enough money left over to cover relocation costs and help get that family over the hump.

For Homeowners Looking to Make a Change

For homeowners that are not in trouble, the rise in equity offers the opportunity to tap into some of that equity through a home equity line of credit to make improvements to the home, such as a kitchen or bath remodel, add a pool or outdoor kitchen, etc., or possibly even use those funds to purchase a rental property. Alternatively, when rising equity is coupled with record-low mortgage interest rates, this could be the perfect time to make a move to a larger, or more attractive, home, or even cash-out and downsize.

As Mark Fleming, Chief Economist at First American notes:

“As homeowners gain equity in their homes, they are more likely to consider using that equity to purchase a larger or more attractive home - the wealth effect of rising equity. In today’s market, fast rising demand against the limited supply of homes for sale has resulted in continued house price appreciation.”

Do you want to know approximately how much equity you have in your current home and how much home you can likely afford? CLICK HERE to find out, Instantly, For Free!