Homeowners’ Equity Continues to Improve

The Board of Governors of the Federal Reserve System published the Financial Accounts of the United States for the second quarter of 2017. The balance sheet of U.S. households with real estate continues to improve as the increases in home prices continue.

Households’ owner-occupied real estate increased to $23.8 trillion in the second quarter of 2017, $1,597 billion more than the second quarter of 2016. Total home mortgage debt outstanding stands at $9.9 trillion, $250 billion more than the same period of 2016. Since the market value of households’ real estate appreciated and liabilities (home mortgages) grew more slowly, the value of owners’ equity in real estate, the difference between the value of owner-occupied real estate and home mortgage debt, rose to $13.9 trillion over the second quarter of 2017.

The figure below shows the changes in the aggregate market value of households’ real estate, aggregate mortgage debt and the aggregate value of owners’ equity in real estate.

From 1987 to 1999, the market value of households’ real estate rose by $4.6 trillion, from $5.3 trillion to $9.9 trillion. Over the same period, mortgage debt increased by $2.5 trillion from $1.7 trillion to $4.2 trillion. As a result, the value of owners’ equity in real estate increased by about $2.2 trillion, from $3.6 trillion to $5.8 trillion.

The market value of households’ real estate rose to $22.7 trillion in 2006, increasing by $12.8 trillion from 1999. Meanwhile, mortgage debt rose by $5.1 trillion from $4.2 trillion to $9.2 trillion and the value of owners’ equity in real estate jumped to $13.4 trillion in 2006, $7.7 trillion higher than the $5.8 trillion recorded in 1999.

After the rapid growth, the market value of households’ real estate declined by $6.6 trillion to $16.0 trillion between 2006 and 2011, while mortgage debt rose by $0.7 trillion over the same period. In consequence, the value of owners’ equity in real estate dropped by $7.3 trillion to its trough in 2011, $6.1 trillion.

Since 2011, the market value of households’ real estate has rebounded. In the second quarter of 2017, it was $23.8 trillion, $7.8 trillion higher than six years ago. Mortgage debt barely changed over the past six years and has remained at $9.9 trillion. Thus, the value of owners’ equity in real estate rose by $7.8 trillion reflecting the increase in the market value of households’ real estate.

The figure below presents the value of owners’ equity in real estate with two ratios, the share of owners’ equity in real estate and the loan-to-value (LTV) ratio across all homeowners, from 1987 to current. The share of owners’ equity in real estate is calculated by dividing the aggregate equity position by the market value of owner-occupied real estate held by U.S. households. The loan-to-value (LTV) ratio is defined as the ratio of total households’ mortgage debt to the market value of households’ real estate. The two ratios sum to 100%.

Between 1987 and 1999, the market value of households’ real estate increased by 88% while mortgage debt rose by 145%. Due to the faster percentage growth in mortgage debt, the LTV ratio rose and the share of owners’ equity in real estate shrank.

From 1999 to 2006, the market value of households’ real estate rose by 129% and mortgage debt increased by 122%. Since the percentage changes were similar, both the LTV ratio and the share of owners’ equity were flat. The share of owners’ equity in real estate didn’t change a lot from 1999 to 2006 even though the value of owners’ equity rose as shown in the figure.

During the collapse of home prices, the market value of households’ real estate declined by 29%, compared with an 8% increase in mortgage debt. The increase in mortgage debt and the decrease in the market value of households’ real estate together pushed up the LTV ratio and pushed down the share of owners’ equity in real estate.

Moreover, the market value of households’ real estate rose by 49% from 2011 to 2017, however, mortgage debt was unchanged over the same period. As a consequence, the LTV ratio decreased and the share of owners’ equity in real estate rose.

In nominal terms, owners’ equity has returned to its pre-recession peak level. However, in contrast to the housing boom era, mortgage debt growth remains subdued. This partly reflects the frictions in mortgage lending. It also suggests that aggregate market risk remains contained, although the loan-to-value ratio of home purchasers has risen in recent years. Finally, since buyers of new homes are typically trade-up buyers, they often seek to sell their existing home and use the equity to purchase a new home, then the growth in owners’ equity may also be supportive of new home demand.



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