Home Equity, Like Real Estate, is Local

by Danielle Hale, Research Economist

For the third year in a row, NAR Research has looked at the equity a homeowner might have in a home owned for 5, 10, 15, and 20 years if it were purchased at the median price. This analysis allows us to learn about the effect of price patterns in many metro areas on homeowner equity over longer periods of time. Examining longer periods of time is important because typical buyers expect to own their home for 7 to 15 years, depending on the buyer’s age. Among all buyers, the typical tenure in a home is 10 years. While this is the first year in which our analysis looks at the effect of falling home prices on equity in a wide-spread manner at the 5 year time frame, over a 10 year period (the typical expected time of ownership), the equity situation for our experimental buyers is much more sanguine.

Equity and Wealth – The National Picture

Homeowner equity is a substantial component of household wealth. The Federal Reserve’s Survey of Consumer Finances, which is conducted every three years, provides a snapshot of household income and net worth along with basic demographics and detailed information on where households keep the wealth they have accumulated. The most recent survey (conducted in 2007) reflects the situation
before home price declines and the tumbling equities market hit household balance sheets. At that time, the median net worth of homeowners was well over $200,000 compared to the median net worth of $5,000 for renters. Furthermore, $200,000 was the median value of owners’ homes.

Federal Reserve researchers also conducted a thought experiment to determine how market declines might have impacted the mean and median households through October 2008. Building on the Fed’s data, NAR Research estimated the impact for renter and homeowner households through calendar year 2008. The result suggests that despite declines in equity and housing markets, the typical U.S. homeowner ended 2008 with a net worth many orders of magnitude greater than that for the typical renter.

The Local Picture – and Assumptions

The equity calculations at the metro level are based on the following assumptions.

  1. Homeowners had 100 percent financing for the purchase price of the home (i.e. did not make any down payment). This would tend to underestimate the amount of equity earlier home purchasers have accumulated. According to the most recent NAR Profile of Home Buyers and Sellers, in 2003, 39 percent of first-time home buyers put 10 percent or more down. While the amount of downpayments trended down throughout the decade (in 2007 and 2008, 45 and 34 percent of first-time home buyers, respectively, financed 100 percent of the home purchase price), the 2009 data show that only 20 percent of first-time home buyers financed 100 percent of their home purchase.
  2. Homeowners have not tapped into any of the equity in a home with lines of credit. This is likely to overstate the amount of equity currently available to home owners, but does not affect the consideration of how much equity could have been built up.
  3. Home buyers financed their home purchase with a 30-year fixed rate mortgage, that the loan was fully amortized (buyers pay both principle and interest over the 30-year period), and that home buyers have not refinanced since the initial purchase. If buyers took out interest-only or balloon loans, the calculations overestimate equity in a home. This assumption may lead to an underestimation of home owner equity if buyers took advantage of the opportunity to refinance and did not pull cash out at that time.
  4. All equity gains are expressed in nominal dollars.

Latest Results

Despite the national scope of the housing downturn, our look into the latest equity picture reminds us that real estate is incredibly local. For instance, 87 metropolitan areas have had positive price appreciation over a five-year period. In the top 13 areas, a median buyer could have accumulated more than $50,000 in equity over the last five years. Among the 67 areas that have had negative price appreciation, if a buyer had put zero down on a regular 30-year fixed-rate mortgage and paid it regularly upon purchasing a median priced home, equity would remain in 25 areas.

It’s important to note, however, the impact of the recent housing crisis in many metro areas where those “price corrections” were devastating. Owners would be more than $50,000 “underwater” in 11 of those metros, all of which are in the “boom and bust” states of California, Nevada, and Florida.

Over the last 10 years, the price and equity picture is much brighter. Median buyers in the top 29 metro areas could have accumulated at least $100,000 or more in equity. Interestingly, 4 of the 6 California cities that have had the biggest equity losses over the last 5 years are among the biggest gainers over a 10-year horizon. Only 12 of 154 metro areas had negative price growth over this 10 year period, and only 7 areas—concentrated in the “rustbelt” states of Ohio and Michigan—experienced a decline substantial enough to leave a median buyer underwater.

Over an even longer term, we see positive equity build-up in all areas. For example, in 75 of the 154 areas in this experiment a buyer who bought at the median price 20 years ago could have over $100,000 in equity in her home. In an additional 67 areas, the buyer could have more than $50,000 in equity. (Individual metro reports are available on our web site.)

Not Just an Investment – a Home

Of course financial considerations are not the only factors that matter to owners. There are substantial non-financial benefits to buying a home—owners have a stable place to live and the bulk of their monthly housing costs, principal and interest, will not go up. Homeowners are also more likely to invest in their community by participation in membership and community organizations. REALTORS® help buyers and sellers by navigating the local market and also by increasing awareness of these long-term financial and non-financial benefits to home ownership.

Into the Recovery

How has the recovery of the stock market and a sluggish housing market affected owners and renters? For the first time ever, the Federal Reserve resurveyed the 2007 participants in 2009 to directly measure how the crisis and recession affected their finances. These results are expected in late 2010. NAR Research will again analyze this information when it becomes available.