Many Owners May Underestimate Their Equity
August 6, 2015
A large number of home owners may be erroneously perceiving themselves as underwater on their mortgage, suggests a new analysis by economists at the University of California, Berkeley.
Between mid-2011 and the fourth quarter of 2014, home prices nationally have risen about 20 percent. But in a recent Fannie Mae National Housing Survey, the percentage of home owners who perceived they were underwater on their mortgage averaged about 6 percentage points more than estimates from other national surveys.
According to CoreLogic housing data, from the end of 2011 to the end of 2014, the number of underwater home owners fell from 21 percent down to 9 percent.
However, about 23 percent of home owners surveyed by Fannie Mae say they had negative equity at the end of 2014.
What's more, by the end of 2014, only 37 percent of home owners with a mortgage in the Fannie Mae survey perceived they had more than 20 percent of home equity, but CoreLogic data showed that 69 percent had significant home equity.
Regardless of an increase in home prices after 2011, the percent of home owners who have perceived significant home equity has barely budged.
The National Association of REALTORS® recently reported that the median existing-home price for all housing types reached $236,400 in June – surpassing the median sales price set in July 2006 at the time of the housing boom.
Many home owners may not be realizing how much values have risen since 2011, economists note. By not realizing those equity gains, they may not see opportunities for selling and buying different homes and their chances of qualifying for mortgages.
Read more: Home Prices Reach an All-Time High
The researchers at University of California, Berkeley, refer to it as a "negative perception gap" or an "appreciation gap," which they say is impeding the housing market. They estimate that at the end of 2014, the gap between the estimated and perceived percent of mortgage home owners who had significant equity was 32 percentage points – which would equate to about 15.2 million home owners.
"The appreciation gap presents a potential opportunity," the authors note. "It is an opportunity to remove a barrier that may have hindered housing and mortgage market activity. … Better appreciating how much their assets have appreciated ought to strengthen home owners' demand for housing, as well as their demands for other goods and services. Thus, in addition to the opportunity to help home owners on an individual basis, shrinking the appreciation gap presents a potential opportunity to speed up the recovery of the housing and mortgage markets, better match workers with jobs, and strengthen the economy generally."
Source: "Are 30 Million Home Owners Underestimating Their Equity?" Real Estate Economy Watch (Aug. 4, 2015)
Updated: May 24, 2019