Rising Home Prices Creating Equity
Rising Home Prices Have Helped Create Equity Between Market Value and Mortgages
The effects of the COVID-19 pandemic on the global economy have been felt by people all over the world and in every life stage. Despite this, one area that has been largely unaffected is the housing market. The United States is about six months into facing the pandemic, and the market is seeing rising house prices, decreased mortgages, and increased equity. Let’s examine this phenomenon and the factors behind it.
The Stats on Equity-Rich Homes
A home is considered equity-rich homes when the loan to value ratio is 50% or less. By the end of 2020’s second quarter, over 15 million homes in the U.S. are currently considered equity-rich. This is about one in four mortgaged homes in the U.S., and it’s a 1% increase from the number of equity-rich homes in the first quarter. Every state but Hawaii has seen an increase in equity-rich homes, with the greatest increases being in the Midwest and the South. This is the kind of good news people are desperate for in a world that’s shaped by a global pandemic and dire economy.
House prices rising in 2020 isn’t anything new. They’ve been on the rise for nearly a decade following the Great Recession. Typically, the real estate market does not catch up with the rest of the economy until later. So if you want to understand why homeowners are reaping the rewards of a strong housing market, you have to look backward in time.
In recent years, housing has generally experienced limited supply and high demand. Regardless of how the market is doing as a whole, low supply and high demand will always increase prices. Low interest rates have also helped keep home prices stable.
COVID-19’s Impact on the Housing Market
When states first went into lockdown, real estate transactions were largely on hold. However, over the summer, things opened back up and transactions resumed. July was the busiest month for real estate transactions in over a decade! This surge of activity all at once also led to increased real estate prices.
You can’t discount how government policies have helped keep the market strong. For example, increased unemployment benefits and the stimulus checks from the CARES Act helped people continue to pay their mortgages even if they were out of work or experienced a pay cut. The option of forbearance on mortgages backed by Fannie Mae, Freddie Mac, and Ginny Mae also helped homeowners avoid foreclosures.
The Future of House Prices and the Housing Market
If house prices are going to drop from the pandemic, it probably won’t happen until next year. At that point, there may be an increase in delinquencies and foreclosures. Part of this will simply be the real estate market catching up with the economy as a whole. The government also probably won’t continue policies that have aided the market until this point. For example, the CARES Act’s successor, the HEALS Act, was introduced at the end of July but has yet to be signed into law.
The good news is that even if the housing market does crash, it will most likely not be as significant as it was in 2008. This is because the factors behind the current economic downturn are much different than the Great Recession.