A row of new, densely packed homes are viewed along Boulder City Parkway on January 11, 2022 in Henderson, Nevada.
George Rose | Getty Images
Property values have largely lost ground this year, while previous huge annual gains dwindled to zero. The result is that homeowners lose equity.
According to a report from Cotality, borrowers' equity fell by 2.1% in the third quarter of this year compared to the same period last year, or a total of $373.8 billion. This comes after years of steep increases in property prices and record capital levels. Even after the decline, homeowners still have $17.1 trillion in total net equity on homes with a mortgage.
For the average homeowner, the equity declines mean a loss of $13,400 in the third quarter. Additionally, the number of homes with negative equity, meaning they are worth less than the mortgage they carry, rose 21% year-on-year to 1.2 million.
“As the pace of house price growth slows and markets recalibrate following the peaks of the pandemic, we are seeing a significant shift in equity trends,” said Selma Hepp, chief economist at Cotality. “Negative equity is increasing, due in part to affordability issues that have led many first-time and lower-income buyers to take on too much debt through piggyback loans or minimal down payments.”
Get Property Play straight to your inbox
CNBC's Property Play with Diana Olick covers new and evolving opportunities for real estate investors, delivered weekly to your inbox.
Sign up here to get access today.
Those with negative equity positions likely purchased their homes recently, when mortgage rates were higher and prices were at their peak. Thanks to huge increases over the last five years, homeowners have also withdrawn more equity from their homes.
According to the S&P Cotality Case-Shiller National Home Price Index, home values are now about 52% higher than they were in January 2020. Even after an increase in mortgage rates in 2023, the average equity gain per homeowner was $25,000. In 2024 it was $4,900.
However, not every market experiences the same dynamics. According to the Cotality report, Boston, Chicago and New York all remain positive. The biggest losses were in Los Angeles, San Francisco, Washington, Miami and Houston, Texas.
“The future trajectory of high-leverage loans will depend on the strength of the U.S. economy and labor market,” Hepp said. “While expectations of continued price appreciation and economic resilience remain, it remains important to monitor these loans closely in the coming months.”