Authors:
Wenyao Sha
Senior Data Scientist
Winfield Xu
Director of Data Science

Introduction

U.S. homeowners currently sit on an unprecedented level of equity in residential real estate, even more so than highlighted a year ago.

19.5%

Year-over-year growth rate
of U.S. home equity as of
Q2 2022

Homeowners hold the well-being of homes–both as shelter and as
an investment–near and dear to their hearts. Driven by a combination
of rising demand and limited supply in the post-pandemic reality, the
soaring real estate market of the past few years has led to record-high
levels of wealth creation in the form of home equity. In Q2 2022, the
total value of owner-occupied real estate jumped to $41.2 trillion, which
outpaced the gradual increase in household mortgage debt. As a result,
home equity, namely the difference between the home value and the
outstanding mortgage debt, has grown significantly over the last year.
Today, U.S. households are sitting on over $29 trillion worth of home
equity, growing 19.5% from a year ago and 80% from five years ago.

Housing Market Growth

Home Equity is home value minus mortgage debt

While regional and demographic differences exist, homeowners
nationwide are sitting on an extraordinary level of equity in
residential real estate, more so than at any point in history. Instead
of keeping the wealth locked up in their properties, homeowners
may want to consider their homes as an accessible source of
liquidity.

Geographical

Distribution

Home equity values vary significantly across the country.

The heat map of median home equity value across 50 states reveals
the regional inequality in wealth distribution. The highest median
home equity values are seen in Hawaii, California and Idaho, with the
lowest in Oklahoma, Iowa and Ohio. The median household in Hawaii
and California holds more than $400,000 of home equity while that of
Oklahoma owns a bit shy of $100,000.

Median Home Equity Value

Home Equity is home value minus mortgage debt

Compared to a year ago, all 50 states saw positive growth in median
home equity, 37 of which by more than 10%. Utah, Delaware and
Idaho led the country, whereas Nevada, Mississippi and Minnesota were
among the slowest movers in terms of year-over-year growth.

Top 30 States by Value

Median Home Equity by State

Top 30 States by Growth Rate

Home Equity is home value minus mortgage debt

Median Home Equity YoY Growth by State

Top 20

Metropolitan

Statistical Areas by Value

Looking further into the more granular geographical dynamics of home
equity, each metropolitan statistical area (MSA) exhibited important
variations with regard to the magnitude or the change over time.
While Fayetteville, NC, Hinesville, GA and Jacksonville, NC all delivered
a staggering 50% plus increase in median home equity, places like
Monroe, LA, Elmira, NY and Enid, OK saw a decline by at least 8% each.

Top MSAs - Median Home Equity

Home Equity is home value minus mortgage debt

Top 30 Metropolitan Statistical Areas by Growth Rate

Bottom 30
Metropolitan
Statistical Areas
by Value

Home Equity is home value minus mortgage debt

Demographic

Distribution

Home equity tends to grow as the
years of homeownership increase.

Upon the closing of a home purchase, homeowners
embark on a yearslong journey to fulfill their obligation to
pay back the mortgage debt. By way of debt amortization
and home price appreciation, homeowners build up home
equity gradually over time. As a result, home equity tends
to grow as the years of homeownership increase. Based
on CoreLogic data, home equity on average triples over the
first 10 years after a home purchase.

Median Home Equity since Home Purchase

Year(s) since Home Purchase

This pattern is also evidenced by the U.S. Census
Bureau’s findings. Based on the latest wealth and
asset ownership data, the more senior a homeowner
is, the more they hold in home equity, both in terms of
the dollar value and a percentage of total net worth.
However, such high concentration of wealth in home
equity, a single illiquid asset class, often comes when
the homeowner starts to face increasing liquidity
needs, such as health care, home renovation,
education, etc. With 71% of Americans concerned
about Social Security running out of money, many may
have to seriously consider delaying retirement. Finding
an optimal way to unlock their home equity could help
homeowners solve the problem.

Distribution of median home equity by age groups

Median home equity is estimated based on the difference between median net worth and median net worth excluding home equity.

Economic

Outlook

An uncertain economic environment prompts
homeowners to think about optimal ways to access
home equity.

Even with the record-breaking home prices seen in recent years,
homeowners are unable to merely sit on their wealth, carefree.
Firstly,
the post-pandemic secular imbalance between growing consumer
spending and disrupted supply chains has led to some of
the most
severe inflation since 1982, eroding the real purchasing power of
household assets. In other words, while homes are becoming more
expensive, so is everything else.

The situation worsens as consumers begin to take on more debt.
Household debt topped $16 trillion for the first time in August, 2022.
Both auto loans and credit card loans likewise shot up to new highs.
To combat the inflationary pressure, the Federal Reserve entered a rate-hiking cycle beginning in March, 2022 and was expected to increase the
benchmark rate to as high as 4.6% by 2023. The increasing interest
rates induced an even higher debt burden for households whose
interest payments were tied to the benchmark rate.

Finally, the real estate market itself has shown signs of cooling. Fueled
by a lack of affordable homes and the rising cost of debt, potential
buyers are increasingly more hesitant to pull the trigger as home sales
decline, which in turn further discourages builders from building more
units. As such, the softening home price directly translates to a decline
in homeowners’ wealth.
While various fundamental factors such as constrained supply in urban housing and high wage growth still point
to an above-average appreciation in home price in the medium to long
term according to a recent study by Unison, homeowners are still likely
to be struggling with preserving purchasing power, eliminating debt, and
safeguarding their wealth against economic headwinds in the near term.

Today, homeowners across the country are facing a dilemma. On the
one hand, they’ve accumulated tremendous wealth in home equity
since they first bought their homes. On the other hand, the illiquid
aspect of their homes limits their abilities to meet cash needs and/or to
deploy the capital efficiently, especially amidst growing concerns over
inflation, interest rate hikes, and a slowing economy. To many, a home
is much more than merely a shelter. Homeowners may consider
embracing home equity as a key factor in their long-term financial
planning.

While there are numerous financial products to access home equity,
hardly any are able to do so without adding debt. Typical debt solutions
include a home equity loan, a HELOC and a cash-out refinance. Equity
sharing agreements (ESA), on the other hand, provide an innovative way
that allows homeowners to unlock their home equity without taking on
any additional debt. That means homeowners pay neither interest, nor
any monthly payments. An ESA does this by investing in the home with
the homeowner, and then shares in the gain or loss when the
homeowner decides to sell.