A tightly packed parcel of new homes is seen along Boulder City Parkway on January 11, 2022 in Henderson, Nevada.
George Rose | Getty Images
Home values have been losing ground for much of this year, with previously huge annual gains wiped out. The result is that homeowners lose their equity.
Borrower equity fell 2.1% in the third quarter of this year compared to the same period last year, a collective $373.8 billion, according to a report from Cotality. This comes after years of sharply rising house prices and record net worths. Even after the decline, homeowners still have an overall collective net worth of $17.1 trillion in homes with a mortgage.
For the average homeowner, the decline in equity in the third quarter translates into a loss of $13,400. Additionally, the number of homes with negative equity, meaning those worth less than the mortgage, increased 21% from last year, to 1.2 million.
“As the pace of house price growth slows and markets recalibrate from pandemic peaks, we are seeing a clear shift in equity trends,” said Selma Hepp, chief economist at Cotality. “Negative equity is on the rise, in part because of affordability issues that have led many first-time and low-income buyers to over-leverage through piggyback loans or small down payments.”
People with negative equity likely purchased their homes more recently, when mortgage rates were higher and prices peaked. Homeowners have also taken out more equity in their homes, thanks to huge gains over the past five years.
Home values are now about 52% higher than they were in January 2020, according to the S&P Cotality Case-Shiller National Home Price Index. Even after mortgage rates increased in 2023, the average equity gain per homeowner was $25,000. In 2024, it was $4,900.
However, not all markets experience the same dynamics. Boston, Chicago and New York are still positive, according to the Cotality report. The largest losses occurred in Los Angeles, San Francisco, Washington, Miami and Houston, Texas.
“The future performance of highly leveraged loans will depend on the strength of the U.S. economy and labor market,” Hepp said. “Even as expectations of continued price appreciation and economic resilience persist, it remains critical to closely monitor these loans in the months ahead.”