At the end of 2023, Flow of Funds data from the Federal Reserve showed that the total value of owner-occupied real estate registered $44.8 trillion, retreating from its recent high. Meanwhile, with mortgage debt continuing to increase, home equity has declined further from its peak.
Here’s what we learned:
Home value dropped, but was second highest level measured
The total value of owner-occupied real estate declined from its highest point of $45.2 trillion in 2023Q3 to $44.8 trillion in 2024Q4. Despite being $0.4 trillion less than the previous quarter, it still marked the second-highest total home values ever recorded.
In the past year, homes saw an increase in value of $2.2 trillion, marking the smallest annual gain observed in the fourth quarter since 2020, yet significantly surpassing the $1.5 trillion to $1.8 trillion range seen from 2017 to 2019. The value of household real estate now stands at more than double its worth from a decade ago when the streak of home price gains began, amounting to $21.6 trillion.
New mortgage debt continued to grow but was issued at a slower pace
During the fourth quarter of 2023, mortgage debt reached a total of $13.1 trillion, reflecting an increase of $89.7 billion from the previous quarter and $356.5 billion from the same period the previous year. It’s worth noting that this quarter experienced the lowest annual growth in household mortgage liabilities compared to the growth observed between 2020 and 2022. Nevertheless, the annual growth in mortgage debt during 2023Q4 surpassed the range of $270 billion to $276 billion observed during the fourth quarter from 2017 to 2019.
Home equity dropped to the fifth highest level measured
With mortgage debt continuing to climb as the value of real estate retreated, homeowners saw their equity drop in 2023Q4 compared to the prior quarter. During the fourth quarter, the total equity held by homeowners in real estate amounted to $31.8 trillion, marking a decline of $0.4 trillion from the third quarter but still exhibiting a $1.9 trillion increase from the previous year. Equity, when measured as a proportion of real estate value, experienced a slight decrease from 71.3% to 70.9%, further deviating from its peak observed in 2022Q2 (72.5%)—the highest share recorded since 1960. Despite this decline, it remains significantly higher than the lows witnessed in 2011 (46%) and surpasses the 60-65% range prevalent throughout much of the late 1990s and early 2000s. It continues to mark a striking contrast to earlier periods. While concerns persist regarding housing market affordability, it’s evident that today’s households find themselves in a markedly different equity position compared to those in the 2000s.
Home equity continues to be a differentiator for today’s market
Home price declines impact housing equity. As total homeowner equity is down from its peak, we examined again at what immediate price declines could mean for the market. We find that today’s near-record home equity continues to provide a substantial cushion to existing homeowners in the aggregate. Even if the value of homes were to universally decline by 10 percent overnight from their level at the end of the fourth quarter, homeowner equity would still be at 67.7%, on par with early 2021. Similarly, a 20 percent drop in home prices would leave homeowner equity at 63.6%, on par with its level in 2018.
Slow price declines could cause equity to dip further
Under alternate scenarios, in which home price declines are spread out over the next 2 years and mortgage debt were to continue to increase–an unlikely scenario, since if home prices were to begin to fall, mortgage lending would likely also dry up, in aggregate–home equity as a share of total real estate value would still total 59.8% at the end of the window. This ending equity result is somewhat lower than what we’d find in the event of an overnight price decline of 20% (63.6%), a reminder of the important role that home lending plays in household equity in real estate, right alongside home prices.
Find the full Flow of Funds data here.
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