Homeowners’ Equity Improves

The Financial Accounts of the United States for the third quarter of 2017 were published by the Board of Governors of the Federal Reserve System recently. On a nominal and not seasonally adjusted basis, the aggregate market value of households’ real estate continues to improve.

In nominal terms, households’ owner-occupied real estate increased to $24.2 trillion in the third quarter of 2017, $1,572 billion more than the third quarter of 2016. Total home mortgage debt outstanding was $10.0 trillion on a not seasonally adjusted basis, $279 billion more than the same period of 2016. The market value of households’ real estate grew faster than underlying home mortgage debt. As a result, the value of owners’ equity in real estate, the difference between the value of owner-occupied real estate and home mortgage debt, rose $1.3 trillion in the past four quarters and reached $14.1 trillion over the third quarter of 2017.

The two lines in the figure below show the changes in the aggregate market value of households’ real estate, and aggregate mortgage debt, respectively.

As shown in Figure 1, the light blue area presents the change in the ratio of owners’ equity in real estate as a percentage of household real estate from 1987 to the present. The ratio of owners’ equity in real estate as a percentage of household real estate is calculated by taking the aggregate value of owners’ equity in real estate divided by the aggregate market value of households’ real estate.

From 1987 to 2005, the ratio of owners’ equity in real estate as a percentage of household real estate trended downward, ranging from 68.1% to 57.4%. However, during the recent recession, the ratio dropped sharply from 59.2% in the first quarter of 2006 to a historical low of 36.1% in the first quarter of 2009. In subsequent quarters, the ratio experienced a slow increase between 2009 and 2011, largely reflecting a decline in mortgage debt, but also a modest decrease in home values. Between 2009 and 2011, mortgage debt declined by 7.8% and the market value of households’ real estate slipped by 3.3%. Despite the increase, the share of owners’ equity remained below 40.0% until the fourth quarter of 2011.

Since 2012, home price appreciation has largely contributed to the increase in the owners’ equity share of home values. The market value of households’ real estate rose by 48.6% from 2012 to the present, while mortgage debt increased 3.0%. The ratio of owners’ equity in real estate as a percentage of household real estate rose to 58.5% in the third quarter of 2017, approaching its pre-recession level.

Additionally, on the balance sheet of households and nonprofit organizations, there are five different kinds of loans, including home mortgages, consumer credit, depository institution loans not elsewhere classified (depository institution loans n.e.c.), other loans and advances, and commercial mortgages. Over the past year, home mortgage debt grew by 2.9%, while consumer credit grew by 5.4%. As the figure above illustrates, home mortgages represent the largest share of total household loans. However, after the recent recession, even though home mortgages were still the largest share of total household loans, the share of home mortgages declined, falling from 78.0% in the first quarter of 2009 to 67.5% in the third quarter of 2017. Meanwhile, the share of consumer credit continued to grow, and now accounts for 25.4% of total household loans currently.

Overall, the recent increase in owners’ equity in real estate is a reflection of home price appreciation. Higher home prices are partly a response to the low inventory. In nominal terms, the outstanding amount of mortgage debt nationwide has not surpassed its housing-boom related peak and is a declining share of households and nonprofits’ aggregate balance. At the same time, home values have exceeded their housing boom peak. Although more research is needed for confirmation, these trends suggest that while the inventory shortage may be improving the equity position of current homeowners, it may also be eroding affordability at the same time.



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