Negative Equity? Looming Housing Crash? The Truth About Today’s Housing Market

Home equity has been a hot topic in real estate news lately as well as fears of a repeat of the 2008 housing crash. But don’t let those headlines scare you.

In truth, the headlines don’t give you all the information you really need to understand what’s happening and at what scale. Let’s break down these two stories you may be seeing in the news and look at what’s actually taking place. That way, you’ll have the context you need to understand the big picture. First, let’s look at “negative equity.”

Headlines Focus on Short-Term Equity Numbers and Fail To Convey the Long-Term View

One piece of news circulating focuses on the percentage of homes purchased in 2022 that are currently underwater. The term underwater refers to a scenario where the homeowner owes more on the loan than the house is worth. This was a huge issue when the housing market crashed in 2008, but it much less significant today.

Media coverage right now is based loosely on a report from Black Knight, Inc. The actual report from that source says this:

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 unpack that for a moment and provide the bigger picture. The data-bound report from Black Knight is talking specifically about homes purchased in 2022, but media headlines don’t always mention that timeframe or provide the surrounding context about how unusual of a year 2022 was for the housing market. In 2022, home price appreciation soared, and it reached its max around March-April. Since then, the rate of appreciation has been slowing down.

Homeowners who bought their house last year right at the peak or those who paid more than market value in the months that followed are more likely to fall into the category of being marginally underwater. The qualifier marginally is another key piece of the puzzle the media isn’t necessarily including in their coverage.

So, what does that mean for those who purchased a home in 2022? It’s important to remember, owning a home is a long-term investment, not a short-term play. When headlines focus on the short-term view, they’re not necessarily providing the full context.

Typically speaking, the longer you stay in your home, the more equity you gain as you pay down your loan and as home prices appreciate. With recent market conditions, you may not have gained significant equity right away (or perhaps none at all) if you owned the home for just a few months. But it’s also true that many homeowners who recently bought their house are unlikely to be looking to sell quite yet.

OK, what about the fears of another 2008 housing crash? There’s no doubt today’s housing market is very different than the frenzied one from the past couple of years, including the first 4-6 months of 2022. In the second half of 2022, however, there was a dramatic shift in real estate, and it caused many people to make comparisons to the 2008 housing crisis. While there may be a few similarities, when looking at key variables now compared to the last housing cycle, there are significant differences.

In the latest Real Estate Forecast Summit, Lawrence Yun, Chief Economist at the National Association of Realtors (NAR), drew the comparisons below between today’s housing market and the previous cycle:

Looking at the facts, it’s clear: today is very different than the housing market of 15 years ago.

There’s Opportunity in Real Estate Today

And in today’s market, with inventory rising and less competition from other buyers, there’s opportunity right now. According to David Stevens, former Assistant Secretary of Housing:

“So be advised…this may be the one and only window for the next few years to get into a buyer’s market. And remember…as the Federal Reserve data shows…home prices only go up and always recover from recessions no matter how mild or severe. Long term homeowners should view this market…right now…as a unique buying opportunity.”

Bottom Line

In our opinion, knowing context is important. Yes, the market has shifted dramatically in the last six months but today’s housing market is nothing like the real estate market 15 years ago. If you’re a buyer right now, this may be the chance you’ve been waiting for. And, if you have questions about real estate headlines or about how much equity you have in your home, let’s connect.

And, thanks for reading!

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