U.S. Home Owner’s Equity Doubles: Here’s How and Why

    doubling-home-equity

    Diana Olick is a well-known industry writer. Anyone with an interest in Madison real estate can usually find something of value when she comes up with a new entry in her CNBC column (the one with the pun-worthy title, “Realty Check”). This month she commented on the rising housing market across the nation and its repercussions in terms of homeowner equity.

    The piece points out that in the U.S., home equity has doubled over the last five years!

    It’s hardly news that home values have been steadily on the rise—that’s been a trend long seen in the asking prices in Wisconsin and our Madison listings. But the idea of homeowner equity actually doubling could be hard to believe.

    That’s a claim that sounds a like quite an exaggeration…until you stop to think about what is actually being said. When a Madison homeowner sees that their home’s “equity” has doubled, what it doesn’t mean is that its value has doubled.

    Here’s a simplistic example. Suppose a Madison homeowner’s vacation cabin was estimated to be valued at $100,000 in 2011. Doubling the owner’s equity doesn’t mean that today the cabin would be worth $200,000. The “equity” in the property is the amount of investment value currently owned: the difference between its market value (in this case, the original $100K) and the amount owed on its mortgage. So if there were a $70,000 mortgage outstanding on the cabin five years ago, its equity at that point would have been the difference: $100,000-$70,000—or $30,000.

    Using CNBC’s calculations (actually, they relied on research from CoreLogic), for our example property to match the national average, today its owner’s equity would have had to have doubled to $60,000.

    For many Madison real estate owners, that’s not much of a stretch.

    Keep in mind that as time moves on, for all mortgage loans other than interest-only loans, the amount owed is reduced with each payment. If the principal portion of the payments had averaged just $200 a month, the amount owed would now be down to $58,000. For the owner’s equity to have doubled to $60,000, the market value would only have to have risen to $118,000: and that’s a mere 18% rise, which works out to an average of 3.6% per year. That wouldn’t be unusual, considering the steady gains we’ve seen. Long story short: voila—investment equity doubled!

    The moral of the story isn’t just that there are many happy Madison homeowners—but that the investment value of owning a home continues to be what it has been for as long as real estate has been bought and sold: a very canny investment. If you are planning on adding to your own personal Madison real estate investments, I hope you’ll consider using my services as a key part of your strategy. Do call me!

    Jen Stauter Kornstedt
    HomeTeam4U-Stark Company Realtors
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