How the Economy Affects Home Equity

The economy affects home prices, and home prices impact the economy

New homeowners seated on a step in their kitchen
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 Westend61 / Getty Images

Residential real estate, including the place where you live, is an important component of the U.S. economy. The value of residential real estate minus the loans against it is one measure of economic health and has an influence on other parts of the economy. The 2007-2009 financial crisis was driven in part by overvalued residential real estate.

Just as you care about how much equity you have in your home, economists and analysts trying to make sense of the economy are equally interested in broader trends in home values and equity.

Key Takeaways

  • Home equity is the value of your house minus the principal remaining on your mortgage.
  • Economic factors affecting housing prices include demographics, gross domestic product (GDP) growth, income increases, and interest rates.
  • Economic factors affected by housing prices include inflation, employment, and consumer spending.

Home Equity and Economic Health

Home equity is the value of your ownership in your house. It is the value of your real estate holdings less the amount of any loans against the property.

Note

Your home equity may change based on local real estate values, improvements that you make to your house, and the amount of principal remaining on your mortgage, among other factors.

For many people, their home is their largest single lifetime purchase. The Federal Reserve Bank reports that at the end of 2021, American households held a total of $38.11 trillion in real estate, representing almost 27% of total household wealth. The real estate was financed with $11.75 trillion in mortgages.

Residential real estate is a popular asset because the owners can live in the house while they pay it off. They then can live mortgage- and rent-free in retirement or downsize to a less-expensive place, using any extra money to help fund living expenses.

Home equity is the value of your house minus the amount of your mortgage and any other liens. The amount of home equity you possess is an important component of your overall financial health. When aggregated across the regional and national economies, it is an indicator of economic health or problems. It is included in GDP, and it also is tracked on its own.

The Relationship Between the Economy and Home Values

The economy affects how much equity you have in your home. The S&P/Case-Shiller U.S. National Home Price Index shows how the prices of residential real estate have moved over time. The index is set with prices as of January 2000 at 100. It hit a peak of 184.6 in July 2006, an 84.6% increase from January of 2000. Prices started declining during the Great Recession and finally bottomed out in February 2012. The index reached 300.9 in April 2022 after a steady climb during the pandemic.

The relationship works in an inverse way. Real estate values affect other parts of the economy, including employment, retail sales, and commercial construction. When their home equity increases, consumers feel more comfortable making purchases, whether or not they use a home equity line of credit for financing. Some people use home equity to finance purchases or home improvements. Others use their increased equity as justification to spend more earned income, which is known as the “wealth effect.”

Note

During the depths of the pandemic, home equity increased even though the rest of the economy was under pressure.

Economic Factors That Affect Equity

As discussed, the status of various factors that shape the economy has a direct influence on home resale values and equity. Although the correlation can be inverse, it’s important to understand how that impact works. Here are some specific aspects of the economy that can help or hurt the value of your home equity.

Demographics

The single greatest factor affecting home equity is an increase in housing prices, according to CoreLogic, a firm that specializes in data for the real estate industry. The Federal Home Loan Mortgage Corp., or Freddie Mac, reports that over the long term, the biggest driver for housing prices is demographic-driven supply and demand. When more people demand housing, prices go up. This may be because people come to an area for employment, such as in San Francisco, or because the population is weighted toward young families with children, as in Utah.

Personal Income

Personal income can affect how much equity you have in your home because an increase in how much you earn can allow you to pay off your home sooner or to add improvements that build equity.

Across the economy, an increase in personal income makes it easier for more people to afford houses, which drives demand and thus pushes up prices. The National Association of Realtors’ Housing Affordability Index looks at the ability of a family with the median income to afford the median house.

Interest Rates

Higher rates lead to longer-term mortgages and a greater amount of time needed to build equity. They can also lead to lower home affordability, which affects prices and thus equity. On the other hand, the decreased affordability may cause more people to stay in their current homes, thereby building equity by paying off the loan and possibly making improvements while they stay.

The Bottom Line

Analysts at CoreLogic report that on average, home equity increased by $51,000 for homeowners who had a mortgage between June 2020 and June 2021. An increase of that magnitude has many factors propelling it. Home equity affects the economy and, in turn, the economy affects home equity.

Frequently Asked Questions (FAQs)

What would happen to a home equity loan when the economy crashes?

In most cases, the only thing that might change is your ability to repay the loan. The equity value of your house will fall, but you will still need to repay the loan. A bank failure won’t help you either. To a bank, a loan is an asset because it generates regular income, so another bank likely would be happy to take over your home equity loan.

How do I estimate my home equity?

The calculation of home equity is simple. It’s the value of your house minus any debt owed on it. You can find your value through a formal appraisal, or you can estimate it by looking at selling prices of similar houses in your neighborhood. Your bank will have the current payoff value of your mortgage.

What other factors affect home equity?

One component of home equity is the value of the improvements you make to your housing. Keeping the furnace maintained, replacing the roof as necessary, and repainting dated rooms are among the ways that you can improve the value of your residence, regardless of what’s happening in the economy. Such upgrades also will make your house a more pleasant place to live.

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Sources
The Balance uses only high-quality sources, including peer-reviewed studies, to support the facts within our articles. Read our editorial process to learn more about how we fact-check and keep our content accurate, reliable, and trustworthy.
  1. Federal Reserve Bank. “The Great Recession and Its Aftermath.”

  2. Bank of America. “How To Calculate Your Home Equity.”

  3. Federal Reserve Bank. “Distribution of Household Wealth in the U.S. Since 1989,” download Table of Wealth by Wealth Percentile, 2021: Q4 figures.

  4. Federal Reserve Bank of St. Louis. “S&P/Case-Shiller U.S. National Home Price Index.”

  5. Freddie Mac. “U.S. Population Growth: Where Is Housing Demand Strongest?” Page 1.

  6. Harvard University Joint Center for Housing Studies. “Rising Interest Rates and What They Mean for Home Improvement.”

  7. CoreLogic. “Home Equity Wealth Bolsters Economic Growth.”

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