Do you believe homeownership profits during the next 30 years will be a repeat of profits taken over the past 30 years?

  • No, not likely (74%, 29 Votes)
  • Yes, likely (26%, 10 Votes)

Total Voters: 39

With home prices attaining dazzling new heights, 2021 proved to be a banner year for California home sellers.

Home equity creation is primarily driven by home price growth. However, paying down a mortgage is the optimal way of growing home equity in the long term. The rapid home price growth of 2021 led to higher equity gains across the nation and in California as of the second and third quarters of 2021.

Year-over-year, U.S. mortgaged homeowners gained $2.9 trillion in their home equity as of the second quarter (Q2) of 2021, with a total increase of 29.3% and an average gain of $51,500 per borrower, according to CoreLogic’s Homeowner Equity Report for Q2 2021.

By Q3 2021, U.S. mortgaged homeowners saw their equity increase again, this time by 31.1% year-over-year. The roughly 63% of homeowners using mortgage financing saw a collective equity gain of over $3.2 trillion, and an average gain of $56,700 per borrower since Q3 2020, according to CoreLogic’s Homeowner Equity Report for Q3 2021.

Here in California, home equity gains mount even larger — the largest in the nation, at $116,000 year-over-year as of Q2 2021 and $119,000 year-over-year as of Q3 2021.

Homeowners possessing negative equity in their homes — also referred to as being underwater — saw some major relief over the past year.

Negative equity occurs when a mortgaged homeowner owes more on their mortgage payments than what their home is currently worth at market value. [See RPI e-book Real Estate Economics Chapter 4.2]

The share of mortgaged properties in negative equity remains low in:

  • Los Angeles, at 0.7% in Q3 2021, compared to 1.1% in Q3 2020; and
  • San Francisco, at 0.6% in Q3 2021, compared to 0.7% in Q3 2020.

The substantial equity gains of 2021 provided a shield against foreclosure for the 1.2 million homeowners nationwide who reached the end of forbearance in September, while also enabling many homeowners to continue building their wealth.

Related article:

As forbearance exits pile on, where will they go next?

When home prices rise, equity follows

As of October 2021, compared to a year earlier, California’s average home prices were:

  • 18% higher in the low tier;
  • 19% higher in the mid tier; and
  • 22% higher in the high tier.

Historically low interest rates provided a boost for buyer purchasing power beginning in 2020 when the Federal Reserve (the Fed) dropped their benchmark interest rate to zero and began purchasing mortgage-backed securities, fulfilling their role as the lender of last resort to ensure mortgage originations continue.

These low interest rates, along with stiff competition for a dwindling inventory of homes for sale inflated home prices in 2020, gaining even more traction in 2021.

In July 2021, compared to a year earlier, statewide home prices averaged a whopping:

  • 23% higher in the low tier;
  • 22% higher in the mid tier; and
  • 24% higher in the high tier.

The more recent decline in home prices is only the beginning of the descent. Home prices will continue decreasing in 2022 due to several factors. These include:

Related article:

November 2021 California home sales volume declines slightly

High equity and the economy

For now, home equity wealth is at a record high, especially here in California which has seen the highest gains in the nation. These equity gains will provide a safety net for optimistic homeowners looking to spend more of their income in 2022 as the pandemic’s denouement (hopefully) arrives. Higher wealth leads to additional consumer expenditures and supports home improvement projects and other investments in homes.

But for homeowners to access that wealth, they will need to sell and find a replacement residence.

Rising equity for sellers also creates a buffer against financial hardship, such as a job loss, while also giving sellers benefitting from their equity gains financial flexibility to pay off their debts or finance large purchases, all which helps to boost the economy.

The downside of these substantial equity gains is that those who have not yet purchased a home will find it even harder to enter the market now and they will lose out on wealth accumulation.

While most of the 1 million homeowners exiting forbearance programs nationwide are doing so in good enough standing to keep their home, 17% of forbearance exits are up in the air, unable to pay and likely headed for foreclosure or a forced sale. A further 7% may be unable to pay but were able to benefit from the high levels of home equity to either sell or refinance their home to avoid default and foreclosure, according to the Mortgage Bankers Association (MBA).

Related article:

How 1.5 million homeowners exiting forbearance will impact inventory

Inventory and price changes

Though the rising equity and forbearance programs have kept millions of people in their homes — and kept these homes off the market — that will soon change.

As forbearance winds down and jobs are still absent, many will inevitably choose to sell.

When homeowners exiting forbearance lack income sufficient to resume mortgage payments, they will choose a forced sale. This option is available to them thanks to the high equity gains of the past two years, enabling them to avoid the pitfalls of a distressed sale.

Still, these additions to the for-sale inventory will cool home prices — a chain reaction which also cools down equity gains.

Over the long term, buyers who purchase in 2021-2022 will need to stay in their homes for awhile, since home equity gains will cool. They won’t be able to count on the rapid price increases of 2020-2021 to continue.

Your clients may well be concerned about their home equity as prices take a tumble in the months to come. Advise them on protecting their equity by recording a declaration of homestead with the county in which they live. The declaration gives a homeowner priority rights to preserve the equity in their home from loss — due to a creditor’s foreclosure on a judgment lien recorded after the declaration — in the dollar amount of the homestead exemption the owner qualifies to claim. [See RPI Form 465]

Use this FARM letter on the declaration of homestead in your marketing campaign as home equity levels are high — and as they begin to subside along with home prices later this year.

Related article:

2021 in review and a forecast for 2022 and beyond

Want to learn more about negative equity, foreclosure and forbearance? Click the image below to download the RPI book cited in this article.