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The Truth About Negative Home Equity

Friday, January 13, 2023   /   by Laura Larson

The Truth About Negative Home Equity

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Recent real estate news has featured articles on home equity. If you've been keeping up with what the media is saying, you may also be aware of reports about the increasing number of homeowners who have negative equity. But don't be alarmed by those headlines.
 
In actuality, the headlines don’t provide you with all the information you truly need to grasp what’s happening and at what scale. Let’s break down one of the big equity stories you may be reading in the news, and what’s truly happening. We want to provide the background information required to understand the big picture.
 
Headlines Focus on Short-Term Equity and Fail To Convey the Long-Term View
One journalistic article that's been going around recently discusses the proportion of 2022 home purchases that are presently underwater. Underwater refers to a situation in which the mortgage balance is higher than the value of the home. When the housing market crashed in 2008, this was a major problem, but it is now much less serious.
 
Currently, media coverage is loosely based on a report by Black Knight, Inc. According to a real report from that source: “Of all homes purchased with a mortgage in 2022, 8% are now at least marginally underwater and nearly 40% have less than 10% equity stakes in their home...”
 
Let's take a moment to deconstruct that and provide the overall picture. The data-driven analysis from Black Knight particularly discusses properties bought in 2022, yet headlines in the media often fail to mention that time period or to explain how unique 2022 has been for the housing market. Home price growth increased in 2022 and peaked in the months of March and April. The rate of appreciation has slowed down since then.
 
More people are likely to be marginally underwater if they purchased their home last year at the pinnacle of the market or if they overpaid for it in the months that followed. So, what does that mean for individuals who acquired a property in 2022? Owning a home is a long-term investment, not a quick fix, so keep that in mind. When headlines emphasize the near-term perspective, they are not fully explaining the situation.
 
Generally speaking, as you pay off your loan and as home prices rise, the longer you live in your home, the more equity you accumulate. In light of current market conditions, if you had only held the house for a short while, you might not have immediately accrued a sizable amount of equity. However, it's also true that many new homeowners aren't likely to be in the market to sell just yet.
 
Bottom Line
Understanding the context is crucial in everything. Talk to Laura Larson right away if you have inquiries concerning recent real estate news or your home's equity level.