American home values have doubled in seven years.
Homes are the nation’s piggy bank: They’ll be worth a combined $32.8 trillion by the start of 2024, according to federal data, up from $15.6 trillion in the first quarter of 2017.
The figure represents the nation’s home equity — the total value of homes minus mortgage debt — and is the highest on record.
“Homeowners are really the winners in the current economy,” said Jessica Lautz, vice president of research for the National Association of Realtors.
As an asset, American homes have experienced impressive growth. Since early 2012, as the economy was recovering from the Great Recession, home equity values have quadrupled from a low of $8.2 trillion.
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Rising home prices and falling mortgage rates have helped stocks soar, economists say. Another factor is longer homeownership — people are staying in their homes longer. Some homeowners are even feeling trapped in their homes.
The dramatic increase in mortgage rates in recent years appears to be having both positive and negative effects on home equity. As interest rates soared and home prices fluctuated, the equity pool shrunk in 2022, only to rebound in 2023. In 2024, millions of homeowners with unenviable mortgage rates of 3% and 4% are reluctant to refinance or sell.
Housing assets have increased household wealth
Home equity has been driving the record increase in American household wealth: From 2019 to 2022, the median net worth of U.S. households increased 37% after adjusting for inflation to $192,900, the largest increase ever recorded in the Federal Survey of Consumer Finances.
Most homeowners consider their home to be their primary asset: A federal survey found that the value of the typical American home rose from $261,000 in 2019 to $323,000 by 2022.
“Homeownership is the primary source of wealth creation in the United States,” said Mark Hamrick, senior economic analyst at personal finance site Bankrate.
But soaring home values also have a downside — just ask any prospective home buyer.
“Ask any homeowner and they’ll tell you this is great news,” said Tobias Peter, co-director of the Housing Center at the American Enterprise Institute, “but ask any prospective homebuyer and you’ll probably hear the opposite.”
According to the National Association of Realtors, the average sales price of existing homes increased by more than 40% from early 2020 to mid-2022.
The median home price was $438,441 as of May, up about 5% from a year ago, according to Redfin, and the average interest rate on a 30-year fixed mortgage is 7.3%, double what it was in early 2022.
For first-time home buyers, “the ladder has been kicked off.”
For first-time homebuyers, “it’s like the ladder has been kicked out,” said Kyle Moore, an economist at the Economic Policy Institute.
In effect, those who don’t own homes feel locked out of America’s most powerful means of wealth creation.
“We know that the typical homeowner in this country has 40 times the equity of a renter,” Lautz said: $400,000 versus $10,000.
Meanwhile, the new reality of rising mortgage rates is putting many homeowners in a bind.
Real estate agents call this the “lock-in effect.” Most American homeowners have mortgage interest rates below 4%, so selling or refinancing would mean getting a new loan at the current interest rate.
“Even if you downsize your home, your payments can go up,” said Jackie Frommer, chief operating officer of mortgage lender Figure Technology Solutions Inc. “People can’t afford to give up their mortgages, so they can’t afford to move.”
When mortgage interest rates were below 5 percent, homeowners would refinance, sometimes multiple times, to “cash in” their equity to pay for home improvements, college fees and other expenses that couldn’t be covered by savings.
That market has disappeared: Cash-out refinancings fell from 730,000 in the fourth quarter of 2021 to 44,000 in the first quarter of 2023, according to federal data.
Homeowners have fewer ways to leverage their assets
This results in homeowners having fewer ways to access their property.
“Home equity is illiquid, that’s all,” Hamrick said.
With millions of homeowners trapped by low interest rates and unwilling to sell, the inventory of homes for sale has fallen to historic lows. It is slowly recovering.
“That’s a big concern for the market right now,” said Selma Hepp, chief economist at information services company CoreLogic.
People are spending more time at home. “This trend was already on the rise,” Hepp said. “So is this going to grow and what does this mean for super-expensive markets like the coastal markets?”
Experts say homeowners who have taken out a mortgage may not be able to sell, but they do have options to leverage their equity. Here are some tips:
Avoid Cash-Out Refinancing
There’s a reason the cash-out refinance market has dried up: For a typical home, the difference between a 3% and 7% mortgage rate can add about $1,000 to a monthly payment, according to the National Association of Home Builders.
“In fact, it’s a terrible investment,” Peter says. “You’d be much better off just keeping your first mortgage and taking out a second mortgage.”
Consider a mortgage
According to a report from Figure Technology Solutions, home equity loans and lines of credit are now dominating the home equity lending industry as refinancing declines.
Home equity loans and lines of credit allow mortgage holders to take out a second loan using their property as collateral.
Traditionally, a standard mortgage involves consistent monthly payments over a set period of time, with a lump sum payment at a fixed interest rate. A Home Equity Line of Credit (HELOC) works like a credit card, allowing the owner to withdraw funds as needed. Some HELOC lenders prefer that the entire amount be paid up front.
As of July 10, the average mortgage rate was 8.6% and the average HELOC rate was 9.2%, according to Bankrate.
Homes are selling below list price, which is bad for sellers but good for buyers
Open a regular savings account
Finance experts warn homeowners against borrowing too much of their own money: A home equity loan is a monthly payment on top of an existing mortgage, insurance, property taxes and maintenance costs — most of which are on the rise.
“People considering borrowing should consider not just the interest rate but the payment amount and make sure they can afford whatever the payment is,” Frommer said.
Peter said if people are able to get a mortgage, the money should be used for “capital investments” such as going back to school, renovating a home or starting a business.
And remember, a second mortgage takes money out of your home equity piggy bank.
“What you’re doing is turning an asset into a liability,” Hamrick said.
