Long-term Home Equity Trends And What You Should Learn From Them

On average, homeowners in the US have accumulated about $185,000 in home equity according to Investopedia. In contrast, the mean bank balance account (including savings account) was $41,600 as of 2019. This shows that home equity is a far more substantial source of net worth for Americans than their cash savings.

However, just like savings (unless they are growing at a comparable rate) are vulnerable to inflation, home equity may be susceptible to certain external and internal factors and trends as well. Understanding what these trends are and how they have changed over the past decade or so can help you make smart decisions about your home equity.

Home Equity Trends

Home equity trends can be analyzed/perceived through multiple “lenses.” This includes:

Interest Rate

(Source: https://www.macrotrends.net/2015/fed-funds-rate-historical-chart)

If you have a fixed-rate mortgage that you never refinance, the interest rate will have almost no direct impact on your home equity building because no matter which way it trends (go up or down), the equity you build will depend upon your consistent mortgage payments. It’s the same way with a variable-rate mortgage unless you change your amortization period, which may allow you to build equity slower or faster.

But home equity also depends upon the property price, which is something interest rate has the potential to influence. However, the influence is quite limited. Between 1990 and Q1 2023, the median sale price of a home in the US has gone up by at least 3.8 times. Over the same period, the interest rate has actually fallen – from its peak in July 1990 (8%) to between 4.75% and 5% in 2023.

There are mild correlations between periods of significant interest rate hikes and prices of properties going down (as more people pull back from the market), but they are not substantial enough to tie the two variables together.

The lesson to be learned here is that your home price and, as a consequence, your home equity may go up even if the interest rate is high. But if low-interest rates prompt higher market activity and a sharp rise in property prices, you may build equity faster. 

Property Prices

(Source: https://fred.stlouisfed.org/series/MSPUS)

The median sales price of homes in the US has mostly gone up in the past three decades, with two exceptions. The first one, i.e., the great recession should not be considered a natural part of the trend but rather an anomaly because of the unhealthy relationship between the recession, banking systems, and the housing market.

The price dip between 2018 and 2020 is noteworthy because it matches an interest rate hike. The interesting part is that interest rates started going down again in 2019, but property prices continued to slip for several months afterward. This indicates that once the housing market/real estate market builds momentum, it may take some time to reverse course.

The median price shot up (sharply) after 2020 because the interest rates were lowered significantly by the fed. This triggered a lot of market activity (more people buying homes and taking out mortgages), and naturally, the prices went up.

Property prices have a direct correlation with your home equity. In a hot market, your home may be appraised for more than in a weak market. A higher appraisal means you may have more equity in the property.

The lesson to learn here is that in the long term, your home equity is more likely to grow (thanks to the value going up), assuming everything else (like your amortization period) remains the same. However, in the short term, it may be vulnerable to or benefit from a specific pricing trend.

This trend is different for different regions and may also differ from one property type to another.

Geographic Disparity: Median home price in Los Angeles has grown by about 3.75x from 1990. The growth is over five times in New York. The trend should ideally be observed in a shorter time frame (last five to ten years), but it’s easy to see that in some US cities, the prices may go up faster than others, accelerating the pace of your equity building.

Property Type: In some areas, single-family homes may experience a faster price appreciation, while in others, condos/apartments may lead the race.

Home Equity Loans

Two different trends have been observed in 2021 and 2023 and they offer two different lessons. A lot of homeowners were tapping into their home equity in 2021 because it offered the ideal combination – high prices and low-interest rates. High prices meant they could get more equity out of their home, and low-interest rates ensured that the cost of borrowing remained low, whether they refinanced or took out a HELOC.

However, people are still actively leveraging their home equity via home equity loans in 2023, when interest rates are quite high. That’s partly because one of the positive factors remains (higher prices). Once prices become stagnant or go down due to higher interest rates freezing or slowing down market activity, they may not be able to capitalize on the equity they have built up.

How Home Equity Is Leveraged

In 1988, 53% of all home equity loans were used to pay off credit cards or auto debt. The number fell to 26% in 2020. More data points are needed to make an educated insight from this trend, but there are a few lessons to be learned here. It may not make sense to get equity out of your home for debt consolidation when interest rates are high.

However, keep in mind that the interest rates that would apply to your home equity loan may also apply to your other debts, making them even more expensive. So in order to make sure that you are paying off debt in the most efficient way possible, run a direct dollar amount analysis of how much you will end up paying after debt consolidation and how much you will pay if you don’t use equity to merge your debts. There are a few other trends for which there is not enough data to draw conclusions from, like the change of DTI requirements over the years, which may qualify or disqualify some homeowners from leveraging their home equity. However, trends in interest rates and property prices should give you an idea of how certain external factors can impact your home equity