Invisible Equity: Do Homeowners See How Much Home Equity They Are Sitting On?
The recovery of housing markets over the past few years through the end of 2014 has been even more halting than that of the economy. Fannie Mae’s Economic & Strategic Research (ESR) group has pointed out that tepid growth of household incomes has likely weighed down housing markets.
Data from Fannie Mae’s National Housing Survey™ (NHS) suggest an additional factor that may be weighing down housing markets: Homeowners may be underestimating their home equityi. In particular, if homeowners believe that large down payments are now required to purchase a home, then widespread, large underestimates of their home equity could be deterring them from applying for mortgages, selling their homes, and buying different homes.
Recent National House Prices
Figure 1 shows that, after having fallen nearly continuously from mid-2007 through mid-2011, house prices have risen noticeably between mid-2011 and the fourth quarter of 2014ii. From the first quarter of 2011 through the fourth quarter of 2014, house prices rose about 20 percentiii.
Figure 1: House Prices
(Quarterly, Seasonally Adjusted, Q1 1991=100)
Figure 2 shows quarter-to-quarter (annualized) changes in house prices. Following four years of declines, house prices rose at (annualized) rates of between 4 and 9 percent after Q1 2012.
Figure 2: House Price Changes
(Percent, Quarterly, Seasonally Adjusted, Annualized)
Underwater Borrowers Perceive Much Lower Equity Gains than CoreLogic Estimates
When house prices began to rise in the second half of 2011, the home equity of mortgaged homeowners ranged from significantly negative to significantly positive. Just as declines in house prices after 2006 pushed some homeowners underwater, the ensuing 20 percent run-up in house prices would be expected to both (1) significantly reduce the numbers of underwater households, and (2) significantly raise the numbers of households with substantial home equity.
The solid black line in Figure 3 shows CoreLogic’s estimates of the percent of mortgaged homeowners who had total mortgage debt at least 5 percent greater than the value of their homesiv. We refer to these homeowners as having negative home equity or being underwaterv.
Data from the NHS nationally representative sample of U.S. adults allow us to calculate the percent of mortgaged households who perceived that they had negative home equity, i.e., that they were underwater. The NHS asks homeowners how much they are underwater or above water by having them compare their total mortgage debt (the total of their first mortgage, second mortgage, and HELOC balances) to the values of their homes. During NHS telephone interviews, homeowners rely on their perceptions of their homes’ values and their mortgage balances. Unlike respondents to online and mail surveys, NHS respondents have no opportunity to review their personal records or search for data. Presumably, homeowners have or have not acted on the basis of their prevailing perceptions, rather than on perceptions that are revised in light of further consideration of personal or public information.
The NHS offers homeowners a choice of five ranges for their total mortgage debt:
1. At least 20 percent more than the value of your home
2. About 5-20 percent more than the value of your home
3. About the same as the value of your home
4. About 5-20 percent less than the value of your home
5. At least 20 percent less than the value of your home.
We also deemed an NHS respondent to be underwater if total mortgage debt exceeded home value by 5 percent or more, i.e., if the homeowner chose either response 1 or 2 above. The blue dashed line in Figure 3 shows the percent of mortgaged homeowners in the NHS who perceived that they were underwater by 5 percent or more.
Figure 3: Homeowners Who Were Underwater: Estimated vs. Perceived
(CoreLogic estimates were based on data for the end of each quarter, NHS perceptions were based on data for the last month of each quarter)
Through the end of 2011, the percent of mortgaged homeowners in the NHS who perceived they were underwater averaged about 6 percentage points more than estimated by CoreLogic. House prices declined on average from the middle of 2007 through the middle of 2011. The 5 ½ percent decline in house prices from Q2 2010 through Q2 2011 was accompanied by little change in both the percent of homeowners who perceived they were underwater and those estimated to be underwater, perhaps due to homeowners continuing to reduce their first- and second-mortgage balances.
The significant increases in house prices between 2012 and 2014, as expected, significantly reduced the percent of homeowners estimated by CoreLogic to be underwater. From the end of 2011 to the end of 2014, the estimated percent more than halved, falling from 21 percent down to 9 percent.
But NHS data paint a strikingly different picture. Figure 3 shows that, despite the 20 percent rise in house prices, approximately the same number of homeowners (23 percent) perceived that they had negative equity at the end of 2014 as those who perceived that they had negative equity before prices rose 20 percent (26 percent on average in 2011). Surprisingly, then, the significant rise in house prices was not perceived to lift many homeowners above water.
"Above Water" Borrowers Also Perceive Lower Equity Gains than CoreLogic Estimates
The solid black line in Figure 4 shows the CoreLogic estimates of the percent of mortgaged homeowners who had significant (20 percent or more) equity in their homes. The blue dashed line shows the percent of mortgaged homeowners in the NHS who perceived that they had significant equity in their homes (i.e., response 5 above).
The paths of the estimated and perceived percent of homeowners with significant home equity comport with their paths in Figure 3.
First, the percent of homeowners estimated by CoreLogic to have significant home equity always was much higher than the percent who perceived themselves as having significant equity. CoreLogic estimated it to be 53 percent in June 2010, compared with only 32 percent of respondents in the NHS in June 2010.
Second, the gap between the percent of homeowners estimated to have significant home equity and the percent who perceived they had significant home equity also rose as house prices rose. By the end of 2014, while only 37 percent of mortgaged homeowners in the NHS perceived that they had more than 20 percent home equity, CoreLogic estimated that 69 percent had significant home equity.
CoreLogic’s estimates reflect that rising house prices not only lifted many homeowners above water, but also lifted many homeowners into having significant home equity. Similar to Figure 3, Figure 4 shows that homeowners’ perceptions of whether they had significant home equity diverged from estimates of whether they had significant home equity. Despite the significant rise in house prices after 2011, the percent of homeowners who perceived they had significant home equity was almost unchanged—just as the percent who perceived they were underwater was almost unchanged. The 37 percent of homeowners who perceived at the end of 2014 that they had significant home equity had edged up only a little from its 2011 average of 35 percent.
Figure 4: Homeowners Who Had Significant Home Equity: Estimated vs. Perceived
(CoreLogic estimates were based on data for end of each quarter, NHS perceptions were based on data for the last month of each quarter)
Why Have Estimated and Perceived Home Equity Diverged?
One possible explanation for the divergence is that a substantial group of homeowners may not recognize how much the values of their homes rose after 2011. And, even if they recognized that their homes’ values had increased, many homeowners may underestimate how much their homes’ values and home equity increased.
NHS data suggest that homeowners have misperceived recent actual house price changes. During the third and fourth quarters of 2013, the NHS asked homeowners each month whether and how much the values of their homes had gone up or down over the prior 12 months. The national averages of their responses during the third and fourth quarters of 2013 were 2.2 percent and 2.7 percent, respectively. But, the national FHFA home price index shows that, over the prior four quarters, home values actually rose by 8.2 percent and 7.6 percent, respectively. Thus, homeowners seriously misperceived these recent actual house price increases. They perceived only about one-third of the actual percentage increases, in this case implying that, on average, they did not perceive additional home equity equal to 5 percent of their homes’ values.
We have some corroboration that homeowners failed to perceive how much home values had risen. Since the NHS began in June 2010, consumers’ expectations of house price changes have consistently been lower than actual changes. Analysts have long contended that consumers’ expectations of home price changes largely reflect their perceptions of recent actual home price changes. Expectations may sensibly stem from the strong autocorrelation in house price changes. Consumers’ low expectations for home price changes may well reflect perceptions that recent actual house price changes were low. If so, consumers’ perceptions of recent actual home price changes were considerably lower than actual house price changes during 2012 and 2014.
Not perceiving how much home values, and thus home equity, went up would produce widening gaps, such as those shown in Figures 3 and 4, between estimated and perceived home equity. Discerning whether homeowners’ perceptions caught up with estimated home values or fell further behind rising house prices is problematic. The widening gaps in Figures 3 and 4, however, indicate that homeowners may have increasingly misperceived their gains.
Homeowners who underestimate their homes’ values not only underestimate their home equity, they also likely underestimate 1) how large a down payment they could make with their home equity, 2) their chances of qualifying for mortgages, and, therefore, 3) their opportunities for selling their current homes and for buying different homes.
Thus, a "negative perception gap" or an "appreciation gap" may be an important, but removable, impediment in housing and mortgage markets. At the end of 2014, the gap between the estimated and perceived percent of mortgaged homeowners who had significant home equity was 32 (= 69-37) percentage points, which amounts to approximately 15.2 million homeownersvi. Credibly informing an additional 15 million homeowners that they have 20 percent or more equity would remove the appreciation gap and, thus, a perceived, but artificial, barrier that may inhibit many interested homeowners from purchasing another home nearby or from moving to advance their job and career prospects.An Opportunity to Appreciate Appreciation
The appreciation gap presents a potential opportunity. It is an opportunity to remove a barrier that may have hindered housing and mortgage market activity. It is an opportunity that does not require changes in laws or regulations. It does not require additional subsidies by business or government. Costs to close the gap can be low.
Providing homeowners with information and with tools so they can better estimate their home equity may help shrink the gap. Delivering easy, affordable access to better estimates of home values (and perhaps of total debts, too) could afford many benefits. Better equity estimates may promote better choices of houses, mortgages, neighborhoods, jobs, spending and saving, and lifestyles.
Online estimates of home values are widely known and freely available. How credible and accurate the currently available estimates are is an open question. Accurate equity estimates require accurate liability, as well as asset, values, and homeowners having affordable access to their mortgage balances. It is hard to know whether homeowners consider their access to be easy and comfortable. Just as homeowners may misperceive the values of their home assets, they may misperceive their mortgage liabilities. If so, those misperceptions might account for some of the appreciation gaps in Figures 3 and 4. As of now, we have no evidence of misperceptions of mortgage balances. But, if substantial numbers of homeowners underestimate amortization, for example, providing them with easy, affordable access to information and tools might be easy and affordable.
Either the private sector or the public sector could provide information and tools to shrink the appreciation gap. Shrinking the gap is geared not to encourage leverage and unsustainable behaviors, but to help homeowners have more accurate estimates of their home equity. Better appreciating how much their assets have appreciated ought to strengthen homeowners’ demand for housing, as well as their demands for other goods and services. Thus, in addition to the opportunity to help homeowners 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.
Director, Business Strategy
Economic & Strategic Research Group
Professor James A. Wilcox
Haas School of Business
University of California, Berkeley
August 3, 2015
i See NHS releases for survey results, methodology, and questionnaire (https://fanniemae.com/portal/research-insights/surveys/national-housing-survey.html)
ii We used the national, seasonally adjusted, purchase-only, FHFA house price index as the measure of house prices. (https://www.fhfa.gov/DataTools/Downloads/pages/house-price-index.aspx)
iii From Q1 2011 to Q4 2014, the national, seasonally adjusted FHFA house price index that was based on conforming, purchase-only transactions rose by 18.9 percent. Another FHFA house price index, which was based on “expanded data,” rose by 19.3 percent over that period.
iv Source: CoreLogic Equity Reports (https://www.corelogic.com/about-us/researchtrends/equity-report.aspx). CoreLogic estimates the amount of equity for each property by comparing the estimated current value of the property relative to the total of first- and second-mortgage liens outstanding. CoreLogic estimates the current value for each property with proprietary CoreLogic valuation techniques, including valuation models and the CoreLogic Home Price Index.
v Our most recent data from CoreLogic about underwater homeowners was for Q4 2014.
vi U.S. mortgaged homes totaled approximately 47.5 million, according to the 2013 American Community Survey (https://factfinder.census.gov/faces/nav/jsf/pages/index.xhtml, Table B25081).
The authors would like to thank Qiang Cai, Doug Duncan, Tom Seidenstein, and Orawin Velz for their analytical support and feedback.
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