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The housing market has been on quite the ride, leaving many current homeowners wondering what it means for them. The average home price in August was up 13.5% over the same time last year. What that means for homebuyers is that they’ll need to spend more money, along with weathering shifts in their home’s equity.
Why are home prices rising?
We can expect home prices to rise over time due to normal factors like inflation and GDP (gross domestic product) growth. However, in the past few years, home prices have increased exponentially due to radical market conditions. The main drivers of rising home prices come down to the supply and demand of homes and low interest rates.
Supply and demand of homes
Since 2020, people have left the major cities to move to the suburbs. The pandemic sparked increased demand for more space, as many were stuck at home to work and children took their classes online. Another effect of the pandemic was a material shortage in new construction, which further inflated prices.
New home construction slowed down so house hunters were stuck with low inventories, while the demand for homes continued to rise. This created a seller’s market where prospective buyers had to pay top dollar for a home to remain competitive. It put some buyers in a precarious position as well. For example, a family with an existing home could find themselves priced out of the market in their local area.
Higher interest rates
The Federal Reserve has been raising its benchmark short-term interest rate in 2022 in an attempt to keep inflation in check. On July 3, 2019, the average 30-year fixed mortgage rate was 3.95% according to Time. On October 12, 2022, the average 30-year fixed mortgage rate jumped up to 6.85%, almost double from nearly three years ago.
While the Federal Reserve’s decision to raise interest rates is a factor in rising mortgage rates, it is not the only component. Another driver of the surge in mortgage rates is high inflation that’s persistent throughout the year. The price index has increased 8.2% in the 12 months ending with September 2022, according to the U.S. Bureau of Labor Statistics.
Changes to your home’s equity
Rising home prices have an impact on existing homeowners as well. Appreciation in home values change your equity. Let’s look at what rising home prices do to your home’s equity, along with the advantages and disadvantages of this.
Impact of rising home prices on equity
When home values increase, the equity on your home also goes up. For example, let’s say you purchased a home in 2017 for $250,000 with a $50,000 down payment. That means you have 20% equity in the value of your home, or $50,000. Fast-forward to the current year, and your home’s value is now $325,000. Ignoring the principal you’ve paid back in those five years, that’s an increase of $75,000 for a total of $125,000 in your equity.
Pros of higher equity
There are definite advantages to higher equity in your existing home. This includes:
Higher equity also has some downsides to consider. Here are some potential disadvantages:
A Home Equity Line of Credit or HELOC is a line of credit that’s secured by your home’s equity. It provides you with a revolving line of credit, similar to a credit card but with lower rates. If your equity has risen due to current market conditions, a HELOC might be the right product to help with other financial goals.
Benefits of a HELOC include:
The housing market has been on quite the ride, leaving many current homeowners wondering what it means for them. The average home price in August was up 13.5% over the same time last year. What that means for homebuyers is that they’ll need to spend more money, along with weathering shifts in their home’s equity.
Why are home prices rising?
We can expect home prices to rise over time due to normal factors like inflation and GDP (gross domestic product) growth. However, in the past few years, home prices have increased exponentially due to radical market conditions. The main drivers of rising home prices come down to the supply and demand of homes and low interest rates.
Supply and demand of homes
Since 2020, people have left the major cities to move to the suburbs. The pandemic sparked increased demand for more space, as many were stuck at home to work and children took their classes online. Another effect of the pandemic was a material shortage in new construction, which further inflated prices.
New home construction slowed down so house hunters were stuck with low inventories, while the demand for homes continued to rise. This created a seller’s market where prospective buyers had to pay top dollar for a home to remain competitive. It put some buyers in a precarious position as well. For example, a family with an existing home could find themselves priced out of the market in their local area.
Higher interest rates
The Federal Reserve has been raising its benchmark short-term interest rate in 2022 in an attempt to keep inflation in check. On July 3, 2019, the average 30-year fixed mortgage rate was 3.95% according to Time. On October 12, 2022, the average 30-year fixed mortgage rate jumped up to 6.85%, almost double from nearly three years ago.
While the Federal Reserve’s decision to raise interest rates is a factor in rising mortgage rates, it is not the only component. Another driver of the surge in mortgage rates is high inflation that’s persistent throughout the year. The price index has increased 8.2% in the 12 months ending with September 2022, according to the U.S. Bureau of Labor Statistics.
Changes to your home’s equity
Rising home prices have an impact on existing homeowners as well. Appreciation in home values change your equity. Let’s look at what rising home prices do to your home’s equity, along with the advantages and disadvantages of this.
Impact of rising home prices on equity
When home values increase, the equity on your home also goes up. For example, let’s say you purchased a home in 2017 for $250,000 with a $50,000 down payment. That means you have 20% equity in the value of your home, or $50,000. Fast-forward to the current year, and your home’s value is now $325,000. Ignoring the principal you’ve paid back in those five years, that’s an increase of $75,000 for a total of $125,000 in your equity.
Pros of higher equity
There are definite advantages to higher equity in your existing home. This includes:
- More tappable equity. If you’re looking to borrow against your equity while keeping at least a 20% stake in your home, it’s more likely this scenario exists for you.
- Eliminate mortgage PMI. Private mortgage insurance (PMI) is required if you put down less than 20% of the purchase price of a home. Rising home prices may put you over this threshold, allowing you to drop the additional cost.
- Downsizing benefits. If you’re near retirement, empty nesters, or otherwise looking to downsize your home, it is possible that the higher equity on your existing home will offset the cost of a new home.
Higher equity also has some downsides to consider. Here are some potential disadvantages:
- Might need more insurance. The dwelling and outbuilding portion of your homeowners' insurance is tied to the cost of rebuilding. Your insurance premiums may consequently go up.
- Higher property taxes. Rising home prices can lead to higher property taxes. You might feel the financial squeeze if your income doesn’t rise to offset it.
A Home Equity Line of Credit or HELOC is a line of credit that’s secured by your home’s equity. It provides you with a revolving line of credit, similar to a credit card but with lower rates. If your equity has risen due to current market conditions, a HELOC might be the right product to help with other financial goals.
Benefits of a HELOC include:
- An inexpensive way to finance home improvement projects. Interest rates on a HELOC are significantly lower than secured loans like credit cards. If you have a kitchen that’s long overdue for renovation or you want to finish that primary bathroom, a HELOC provides an affordable solution.
- Greater borrowing ability. Aside from home improvement projects, you may have other pressing goals that a HELOC could help with. Your increased borrowing ability can help pay for your child’s college education, consolidate higher-interest debt, and oversee other goals.