Home equity declines for the first time in over a decade

U.S. home equity declined for the first time in 11 years, but the downward trend could be short-lived, according to new data from CoreLogic.

The amount of equity among homeowners currently holding mortgages on their properties inched down 0.7% on an annual basis in the first quarter, resulting in an average loss of $5,400 per household and a collective total of $108.4 billion. It was the first case of negative annual growth since 2012, according to the property data and analytics provider's quarterly homeowner equity report. Mortgaged homes comprise approximately 63% of all U.S. housing units. 

The data marks a turnaround from three months earlier when homeowner equity increased by 7.3%, or $14,300, in equity year over year, representing nationwide growth in household wealth of $1 trillion. Meanwhile, 12 months earlier, in the first quarter of 2022, collective equity shot up by an even larger $3.8 trillion. 

The first-quarter downturn largely reflects the deceleration and flattening of home values from month to month in the second half of 2022 after they surged to record highs less than a year earlier. But with recent data showing a small pick-up to start 2023, the current falloff may turn out to be a short-term blip rather than the beginning of a prolonged crisis, according to researchers.

"Home equity trends closely follow home price changes," said CoreLogic Chief Economist Selma Hepp in a press release. "As a result, while the average amount of equity declined from a year ago, it increased from the fourth quarter of 2022, as monthly home prices growth accelerated in early 2023." 

Earlier in June, CoreLogic's Home Price Index found housing costs had continued increasing between March and April by 1.2%, and were up 2% annually, running counter to earlier predictions. 

Most of the 14 states posting annual drops in home equity levels were located in the West, where housing values previously soared thanks to elevated pandemic-fueled demand. Average equity fell the most in Washington State with a decrease of $74,300, followed by California and Utah, which saw home values depreciate by $59,600 and $37,400, respectively.

On the opposite end, homeowners in Hawaii, Florida and Rhode Island gained the most in equity with growth of $24,900, $24,500 and $23,700.

The lack of any significant rise from quarter to quarter in underwater mortgages — where the amount owed exceeds home equity available — also suggest early-year losses may turn out to be an anomaly, CoreLogic said. The number of underwater loans remained unchanged from the fourth quarter at 1.2 million, or 2.1% of all mortgaged properties. But compared to the first quarter last year, borrowers finding themselves in a negative-equity situation increased by 4% from 1.1 million homes. 

Louisiana, Iowa and Oklahoma led all states in the share of underwater mortgages at 7%, 5.4% and 4.2%.

The rapid increase in home equity before last year's dip began is protecting many homeowners, even when they find themselves struggling to keep up with payments. Housing researchers at both Black Knight and Attom similarly noted fewer borrowers falling into foreclosure this year, largely due to the amount of equity in hand. 

"The average U.S. homeowner now has more than $274,000 in equity — up significantly from $182,000 before the pandemic, Hepp said. And future trends appear to indicate that some underwater homeowners who made their purchases when prices were at their highest should be able to see some return of value, according to CoreLogic. 

"While homeowners in some areas of the country who bought a property last spring have no equity as a result of price losses, forecasted home price appreciation over the next year should help many borrowers regain some of that lost equity," Hepp said.