With Home Equity at an All-Time High, Will Homeowners “Lock-In” Even More?

Dave:
Hey, everyone. Welcome to On The Market. I’m your host, Dave Meyer joined today by Kathy Fettke. Kathy, thanks for joining me today. I’m excited to have you here.

Kathy:
I’m excited to be here. I’m so grateful for these data companies that are willing to share all the work that they do with us for free. Just I feel so lucky.

Dave:
It is one of the perks of the job. I mean, most of these reports are free to everyone, but I love that we just get to pick people’s brains about them. And today we are going to be talking with Molly Boesel who is an economist at CoreLogic. If you’re not familiar with CoreLogic, it is a really big reputable data provider. Her and her team just put out the Homeowner Equity Insight report, which goes into really interesting information about just how much wealth Americans are holding in their homes. Kathy, what are you eager to talk to Molly about?

Kathy:
Oh my gosh, so many things, but just home equity loan like is this normal? Has this happened before? Is it going to happen again? I mean, those are questions people have.

Dave:
So much data from the last few years is anomalous. It’s just not normal. And so it’s really important when you’re reading these reports or doing your own market research to understand if what happened over the last few years is likely to continue, or is that a one and done kind of thing? Or perhaps it’s likely to reverse. And so Molly’s report is going to get into this extremely important topic of home equity. And I think you’ll learn a ton about how all of this pent-up equity is really impacting the housing market and may impact your investing decisions in the years to come.
So with that, let’s bring on Molly Boesel from CoreLogic. Molly Boesel, welcome to On The Market. Thanks for joining us.

Molly:
Yeah. I’m happy to be here.

Dave:
Molly, can you tell us just a little bit about your job at CoreLogic?

Molly:
Oh, sure. So at CoreLogic, I’m in the office of the chief economist. I’m a principal economist. I’m looking at all sorts of housing and mortgage trends, how they drive the CoreLogic business, how they drive our customers business. In particular, the last few years I’ve been looking at the rental market quite a bit because kind of like 40% of the housing market. So particular interest in that.

Kathy:
And has that changed, I’m just curious, the percentage of home ownership versus renter?

Molly:
After the great recession, the percent of home ownership went down a little bit, but it’s been pretty steady around 60, 65%. So down a little bit from a tie, but roughly… I think census puts that out. The last number they had was 63%.

Kathy:
That’s kind of remarkable considering everything we’ve gone through. Right?

Molly:
Well, I mean, home ownership is really one of the biggest wealth building things a person can do in their life. So I think we’ll get into more on that, but that’s one of the key benefits of home ownership is just building that wealth.

Dave:
Well, I do want to get into your report. That goes a lot into how much wealth people talk about, but actually before now, I just wanted to ask you, giving Kathy’s good question, what do you make of these reports? I don’t know if you’ve seen these news articles that say we’re now the renter nation or that we’re turning into this renter nation. What do you make of that narrative?

Molly:
So I think when people think of renter nation, they think you got a lot of younger households. They’re forming their new households becoming renters, and they can’t afford to buy something right now, a lot of times, because two things: One, home prices keep hitting new highs. They’re not going down. And interest rates are so high that it just makes that monthly payment less affordable. But like I said before, we still have about 63% home ownership rate. It’s been holding pretty steady at that over the last 10 years. So not really becoming a renter nation, but I can see where people are going with that. And there’s a lot of single family investors in the market, so buying up single family properties, holding onto them and renting them out. So there’s a lot of news about that as well. So that feeds that kind of narrative about a renter nation.

Kathy:
There’s a lot of talk that it’s never been so unaffordable to buy a home, and I’ve been around for decades and I’ve seen times when it was pretty bad. Would you say this is the worst?

Molly:
Yeah. Well, we look at something we call that typical mortgage payment. So that’s if you want to take that medium priced home, look at just 20% down, what we call a plain vanilla type of loan, 30-year loan, and how much would that monthly payment be? And then you want to inflation adjust that because people’s income grows over time. So we did hit one of the highest monthly payments back in right before the great recession. So in 2006. And then we had home prices falling after that. We had interest rates going very, very low. And then as home prices were increasing while things were recovering and interest rates were still incredibly low, that kept the monthly payments very low.
All that reversed when we had mortgage rates head up six, seven, 8% recently. And that monthly payment, typical monthly payment, did reach an all time high in mid 2023. So that’ll be coming down a little bit as mortgage rates thankfully have started to fall again.

Dave:
Well, that is one side of the rapid appreciation that we’ve seen over the last couple of years that things are now becoming unaffordable relatively for people who don’t yet own a home or are aspiring to buy a home. But the other side of that is it has also led to an enormous amount of wealth building for those who do own homes. And your most recent report, the Homeowner Equity Insight report goes deep into that. So can you just tell us a little bit about the scope and purpose of this report?

Molly:
So what we want to do is track homeowner equity. So how much equity of homeowners built up? So a little fun fact, when we first released this report back in 2010, it was a negative equity report because that’s really what everyone was concerned about back then. Negative equity was about a quarter of all borrowers were underwater, meaning they owed more on their home than it was worth. That led to all sorts of problems. So over time though, the concern really dropped about negative equity and our current report, negative equity is about 1.9%.

Dave:
Wow.

Molly:
I like to go out an extra decimal point and say 1.85% because it’s a little lower than last quarter, but that’s down from 25 to 1.9%. So we’re really not worried about negative equity anymore. We’re thinking about home equity. The reason you want to think about home equity is what if a borrower gets in trouble with their payments? They get behind on their payments? They get maybe six months behind on their payments, let’s say. If they’ve got a sufficient cushion, it would be unfortunate they’d need to sell their home, but they would sell it instead of losing it to foreclosure. They would have definitely enough left from the sale to pay for the mortgage and then maybe even some leftover from that. But the key is they won’t be losing it to foreclosure and they won’t be having a foreclosure on their credit report. So that’s a really important part of home equity, and that’s one of the reasons why we want to track that.

Kathy:
That equity is a huge cushion from a potential crash happening. How much equity on average do homeowner… I mean, I’m sure it’s different everywhere, but on average?

Molly:
So if you look at on average, the average borrower has… Our last report I think is $304,000 of home equity.

Dave:
That’s a lot.

Kathy:
Yeah.

Molly:
That’s a lot. If you look at their loan to value ratio, it’s under 50%. So they’ve got a lot of cushion built up there. But that’s nationally. It does vary from all the way from 1.2 million in San Francisco and San Rafael down to about a hundred thousand in Lafayette, Louisiana.

Kathy:
Is that a record in equity growth?

Molly:
Yeah. I think it is a record in the amount of average equity, definitely. We started to hit, prices were softening a little at some point in 2023 from last year. They did go down in some places, but not by much. But that’s all kind of reverse direction. And equity did start to head back up again. But even when it did decline a little bit in the second quarter, it was still almost $300,000 per borrower.

Dave:
Wow. One of the things that I get a lot of questions about personally is about the risk of a foreclosure event or crisis, similar to what happened during the financial crisis. Can you help our audience understand why this level of home equity helps insulate against foreclosures or potential foreclosures?

Molly:
This was a big topic, especially right when the pandemic hit, and we had all the delinquencies shot up, obviously, and those borrowers were on forbearance. But as that forbearance came off, there was some worry that foreclosures would start. Well, that hasn’t happened. One thing is the job market has been great. We still have a really strong job growth, very low unemployment rate. When you have people employed and making money, you’re typically paying their mortgages. So that’s one thing. The delinquency rates are just incredibly low.
But if the borrower should go into, let’s say, later stages of delinquency, and even if a bank should start the foreclosure process, the borrower would have the option to sell their home and pay off that mortgage. So I’m giving the example of… I looked into this a little bit because I thought, “Wow, some of these metros have some really low average equity.” Low, right, a hundred thousand dollars. But in even these places with a hundred thousand dollars average equity, their average outstanding balance is about a hundred thousand dollars. So again, they’ve got that 50 loan to value ratio, so they got plenty of equity in there should they run into trouble with their payments.

Kathy:
Obviously, people who bought 10 years ago are enjoying the growth, but we had a lot of buyers just over the past few years who couldn’t possibly have that much equity, could they?

Molly:
No, no. Right. So they do have lower amounts of equity, but they still have a cushion. They still have their… Because prices have their rising, they still have their down payment amount, and then a little bit of equity. Prices went up about 5% over the last year. So they still have that appreciation.

Dave:
Is there any cohort to follow up on Kathy’s question that has negative equity on average? I would imagine if people bought in August of 2020 June to August of 2022 or anything like that?

Molly:
I haven’t looked in the most recent quarter of purchases, so I don’t really have a good answer for that. Some of the borrowers with the least amount of equity are actually those ones still from right before the great recession.

Dave:
Wow.

Molly:
Some of them still have not quite recovered.

Dave:
Molly, how do you think the combination of high homeowner equity alongside the lock-in effect whereas mortgages are… I heard earlier today, the average mortgage right now is around three and a half percent or something like that. How do you think those two things together are impacting the overall health of the housing market?

Molly:
Wow. There’s just some spillover effects there. You say, “Hey, yeah, I’ve got all this great equity. I got a low mortgage rate. I’m sitting pretty.” But what if I want to move, right? About, I think it’s around 85% of mortgages have interest rates under 5%. We’re not even close to a 5% mortgage right now, but let’s say you are around 5% and you said, “Okay, maybe I’ll move and get a 6.5% mortgage.” That’s still quite a big increase in your payment. So that sitting on that low mortgage rate makes it a lot less attractive to move.
Okay. So what might you do instead? Well, you might stay in your house and renovate. So you’ve got a lot of equity in your home. You could take out a home equity loan, home equity line of credit, home equity lines of credit, or the interest is tax deductible if you use that on your home for renovation. And the interest is tax deductible if you use that to purchase a home, purchase another home.
We talked about renters. Right? So we have this investor report we put out. There are some homeowners which you might be calling… I don’t know if you want to call them accidental investors or however you want to put that. They want to move to another area. They’re sitting on a lot of home equity, so they don’t necessarily sell their current house. They keep that loan mortgage rate, take out a home equity loan, rent out the current property they’re in, and then buy something else with the home equity they have. So we have seen some pretty large increases in investor purchases. So that could be one of the reasons investors are increasing.

Kathy:
I wonder how many new investors are out there. First time landlords.

Molly:
Yeah, definitely. And that does kind of hold… Well, if you want to think about housing as for sale and for rent, it keeps the supply the same. But if you’re thinking of somebody who wants to buy a home that does help contract the for sale supply.

Kathy:
So which markets… Everybody loves this question, but which markets have seen the highest equity growth?

Molly:
So some places, when we talk about on average, the nation has about $300,000, or borrowers have $300,000 in home equity. Some [inaudible 00:15:03] have quadruple that. San Raphael, California, San Francisco, California, about 1.2 million in equity. See, that’s even hard to say. It’s such a big number. Right? So that’s astronomical, right? Keep in mind, their average outstanding mortgage amount is about $600,000. So about double the amount of equity, but they could take that $1.2 million.

Kathy:
Go live anywhere. Right?

Molly:
That actually has some spillover effects. We’re talking about how does this impact the housing market in general. That has some spillover effects. You have people that out migration from very expensive parts of the country is pretty high. So you have out migration from San Francisco, San Raphael to some less expensive parts of the country. They cash in the $1.2 million, pay off their mortgage. They move to somewhere a lot cheaper, can certainly afford a nice home there, but that drives up the prices for everyone who was already in those cheaper areas to begin with.
So that’s another distortion from home equity. We think about all the great things home equity does for everyone. For owners, it’s great. For those who aren’t benefiting from it, it can have a lot of distortions.

Kathy:
I mean, we have a lot of listeners who are landlords or who are people who would like to get their first property, whether it’s a rental or just for their home. So what about them? Obviously, homeowners are doing great, making lots of money, low payments. What about those who don’t own?

Molly:
It is tough. Home prices highest they’ve ever been. Mortgage rates still pretty high, I think. Someone who’s looking for a home has to wait until they find something they want. They really want to stay in because they might need to stay there long enough to build that equity. Also, stay there long enough. Mortgage rates are going to go down next year, so stay there long enough that a few years where they can refinance, but it is getting a lot tougher, I agree.

Dave:
Molly, you’re the most confident person I’ve heard say that mortgage rates are going to go down next year. So now I need to ask you why you’re so confident.

Molly:
Oh, yeah. Well, we’ve had some great news on mortgage rates in the last week. I think everything turned last week when the fed… They didn’t change their stance, but they just reiterated, “Hey, maybe we’re not going to raise a federal funds rate again, but we’re not going to lower it anytime soon, but we are going to lower it next year, two or three times.” I think that was the first time the markets have heard that message. It’s been stating sort of the same thing, but it was, I guess you may say a more dovish message. And then that light at the end of the tunnel, “Hey, this is actually coming.”
And it’s all because inflation is coming down and inflation is expected to keep going down into next year. And when the Fed sees that inflation is down around close to that 2% mark that they are targeting, then they’ll feel confident to lower interest rates. We’ve also seen, because a little uncertainty was removed, we’ve seen that spread between the short-term rates and the long-term rates, the 30-year rate fall a little bit, so that’s helped mortgage rates come down a bit as well. So it’ll be there. It’ll happen.
It’s starting to happen now, and by the end of next year, they’ll be a lot lower than what they are now. They’re not going to be down to 5% at anytime soon. That lock-in effect is going to take a long time to come out, but we will see some route refinancing by the end of next year.

Dave:
That brings up two questions I wanted to ask you, Molly. First, let’s just talk about refinancing. I was just looking a minute ago. I pulled up a chart that shows just how far refinancing activity has fallen. It is the lowest point I really have seen since around the year 2000. It has jumped up a little bit over the last two weeks, so people are a little bit more encouraged.
But do you think given all of the equity that’s trapped in these homes, that as mortgage rates fall, we’re going to see an uptick, a resurgence in the refinance market because this has really hurt mortgage originations and mortgage companies over the last two years.

Molly:
Yeah. So I think who you’ll see refinancing is those… There’s people who are those borrowers that just recently took out mortgages. We’ve got about 2 million, I’d say borrowers who took out mortgages in the last year who have mortgage rates above six and a half percent. So once mortgage rates get down to low sixes, five and a half, that’s who you’re going to see refinancing. It’s not necessarily going to be the borrowers who have the $300,000 in equity. We have those newer borrowers.

Kathy:
Obviously, the lack of affordability has forced a lot of people into renting. It’s what, like, 40% cheaper or something to rent than to own today. But that’s like you said, that’s going to get better. But when I talk to some people or when I read in the show notes or in the messages, people saying, “Oh, you’re crazy to buy a property today at these prices.” You’re giving people bad advice because they’re going to lose all their money when prices come down.

Molly:
Well, I think first of all, you don’t necessarily want to look at the home purchase as like a short-term investment. Right? They need to stay there for the long term. And you’re right, they need to see where prices are going. Is this an area where prices are falling? Maybe they want to wait a little bit. But if prices are kind of stabilizing as it looks like they are, they’re not really going to go down. So when are they going to buy, right? Just never or are they going to just do it now and stay there a while and let the equity build up?

Kathy:
I think there’s this belief that their cycles and when home prices hit a peak, then the next cycle would be down. And especially when there’s talk of a potential recession even though it could be a soft one, a soft landing, that’s what I keep hearing. I just, again, would love your… I think you just explained that, that it depends On The Market, but there’s been a lot of people waiting on the sidelines and not seeing prices come down and missing out.

Molly:
Right. And really, because all the people are on the sidelines, that keeps the potential demand high. And the supply is pretty tight. So if you want to think about back to that great recession, we had the opposite going on. We had a lot of people purchasing, but we had a lot of supply On The Market. New home construction was really high. There was just a lot of supply. So really oversupplied. Not that situation now. So you got these people on the sideline. They’re not going to all jump in at once, so that’s why we’re not thinking that… If you look at all the different home sales forecasts, they’re pretty flat over this next couple of years, up a little bit next year, a little bit more the year after, but all pretty flat.
And that’s just because you’re going to see this slow decrease in mortgage rates. And then those potential buyers on the sidelines just starting to slowly come in as you see some supply loosen up in some areas. So new construction can produce a supply. You have some small zoning changes in some areas that’ll produce a little supply. And then you have just retirees, just again, incrementally releasing a little bit of supply.

Dave:
That makes sense to me, Molly, this sort of slow pickup in home prices. I’m wondering, your report shows that home equity grew 96% over the last decade, which is shocking. Do you think this is a once in a generation thing? In my opinion, correct me if you think differently that the zero interest rate policy thing probably not happening again.

Molly:
No. Yeah, exactly.

Dave:
Well, it was great for anyone who owned property then, and I do expect home prices to go up because home prices went up even before the zero interest rate policy. But do you think it’s important to temper expectations or do you think this could happen again where home prices double in 10 years?

Molly:
Okay. So let’s go first, the zero interest rate policies. We talk about this all the time. It’s probably not coming back. What can you hope for on a mortgage rate bottom? I don’t know, 5%.

Dave:
Yeah. That’s a good mortgage rate.

Molly:
That’s a good mortgage rate, right. We’re not going to head back to that. And are we going to see home prices head back up? Who knows? But probably not. I mean, think about what had to happen this time. I don’t think anybody wants to repeat that, right?

Dave:
Not me.

Molly:
But no one foresaw that coming either, but most likely we’re not going to see a repeat of this, what you said, 96% increase in home equity.

Dave:
Do you have, Molly, any indicators or things that you think help identify markets that may see above average equity growth in the future?

Molly:
I think you want to look at migration patterns. We’ve seen a lot of people moving to Florida still. Last year it had some of the highest population growth in the country. So migration patterns, population growth, and where the jobs are going. When people move to a new location, first thing they’re probably going to do is, “Well, they’re going to relocate, right?” If they have to go into work, so that’s another thing that’s for debate. But say they need to show up to work, they’re going to move to their new location. Maybe they’ll rent for a little bit, but they’ll probably be looking to buy a home. So that’s where you see that demand coming online. That’s where I would expect prices to keep going up.

Kathy:
Places where there’s job growth, wage growth, and still some kind of affordability compared to California or New York.

Molly:
Exactly, exactly.

Dave:
Great. Well, Molly, thank you so much for your time today. We appreciate you sharing your insights and research with us. If people want to grab your report or any of your other work, where should they do that?

Molly:
Oh, right. It’s really simple. Go on corelogic.com and we have all of our reports up there.

Dave:
That is very simple. Thank you.

Molly:
That’s very simple.

Dave:
Well, thank you, Molly. We appreciate your time.
On The Market was created by me, Dave Meyer and Calin Bennett. The show is produced by Calin Bennett with editing by Exodus Media. Copywriting is by Calico Content. And we want to extend a big thank you to everyone at BiggerPockets for making this show possible.