What is EQUITY and Why Does It Matter for Homeowners?

What is EQUITY and Why Does It Matter for Homeowners?

Hi, my name is John Peña, your favorite real estate agent here in El Paso, Texas. Please reach out if you have any real estate needs and let's talk a little bit about home equity. Okay, because this is a very important topic, especially right now in our current market,

but even, you know, all the time, it's an important topic, especially if you're a homeowner. So equity is essentially the current value of your home minus what you owe on the home. So let's say that 10 years ago you bought a home for $200,000 and over the 10 years paying your mortgage statement every month, you've paid down the principal to $140,000.

That means that you've got $60,000 of equity in your home. Okay? Now this is very, very important because this is why real estate makes such great sense as far as being a vehicle to build wealth over time because equity increases over time,

right? Two ways. The first way is what I just mentioned. Every month you pay, you make your mortgage payment and you know, your mortgage payment

isn't just principal. It doesn't just go to the balance of the home. That'd be awesome if it did, but your mortgage payment actually includes the principal and whatever amount of principal is being paid, that does lower the amount that you owe on

the home, but it also includes insurance, it includes taxes, and it includes the interest that you're paying. You know, we've been talking a lot about interest rates. Every month you're paying, you know, most likely several hundred dollars in interest

alone, but you're also hopefully paying several hundred dollars of principal and so that over time increases the amount of equity in your home. There's a second way though that your home increases in equity and that is through appreciation. We've been talking a lot about appreciation on this channel.

Appreciation is an increase in value over time, okay? Now, this is awesome because appreciation means that, let's say that you bought that $200,000 house 10 years ago, well guess what? Due to appreciation, that $200,000 house that you bought 10 years ago, it's probably

worth $300,000 in this market because the last couple of years, the last two especially, have been insane appreciation. Last year in El Paso, it was about 15% alone. So over 10 years, you know, now that $200,000 house might be worth $300,000, you've paid

off $60,000, so now you've got, you know, the difference between what the home is worth now, let's say $300,000 and what you owe on it, we said $140,000, so now you've got $160,000 of equity that you're sitting on, you know, with this home, which is awesome, okay? So here's some data kind of on a more national level.

In the last 12 months, the average homeowner gained $55,300 in equity, okay, just because of appreciation. In the state of Texas, the average homeowner in Texas gained $45,000 in equity. This is just in the last 12 months alone.

Like I said, in El Paso, it was 15% last year from February of 2021 to 2022. Homes appreciated 15%, so a $100,000 home in February of 2021 is worth $115,000 in February of 2022. Just not because you made the home nicer, just because appreciation, supply and demand,

not enough homes, appreciation has climbed so incredibly. So now, some of you are out there and you're very concerned about a housing bubble, right? We had a housing bubble in 2008, 2009 and we saw a similar situation where home prices were increasing and then all of a sudden, the bottom dropped out and home prices actually

depreciated, right? Is that going to happen again? I'm of the opinion, no, okay? And it's not just my opinion, it's the opinion of experts that I believe have facts and data

to back up their answers. So why do I think that we're not in a similar situation? There's a big difference between now, 2022 and 2008. Right now, there's very short supply.

We are facing a national housing shortage. Whenever there is less of something, it tends to hold its value, right? Interest rates have been ridiculously low. We were seeing interest rates around 3%, okay?

So people aren't buying into these homes and having an astronomical mortgage payment due to really high interest rates. Now, interest rates are climbing, but that's not going to trigger a bubble. It's just going to trigger less buyer demand, essentially.

It's a different type of demographic demand. Right now, we are seeing super seniors, essentially baby boomers who have accumulated wealth over the years, downsizing, right? So they're selling these bigger homes that they maybe lived in with their larger families.

Now they don't need all that space, they're downsizing. These people are solid buyers. These folks have more than enough money. These are not risky buyers.

2008 was filled with very risky buyers who didn't have good credit and lenders were giving out loans like candy, right? That's not the same situation that's happening now. People also have much lower debt to income ratios than we did in 2008.

And back to our point here, people have a lot more equity in their home, right? So even if home prices were to drop, people have so much equity in their home that they're not going to end up underwater on the property. So if you're of the opinion or concerned that there's going to be a housing bubble and it's

going to pop, this is a quote, a crash in prices is very unlikely for what that's worth. So back to this topic of equity. What does this mean for El Paso homeowners? Basically it means congratulations because your net worth has increased drastically.

If you purchased your home even recently, it already has appreciated in value. If you purchased your home a while back, 10, 20, 30 years ago, well again, congratulations because now you're sitting on a ton of equity. What does it mean?

What could you do with this equity? If you wanted, you could upsize. You could sell your home, take that equity and apply it to a bigger home. You could do the opposite.

You could downsize. You could sell your home, take that equity and put some of it to a smaller home and then put the rest of it to something else. Investments, retirements, a vacation home, travel, right?

You could make renovations. You could take out a home equity line of credit and you can make renovations. You could add a pool in the backyard, which just increases your property's value. So if you're an El Paso homeowner, again, congratulations because now, due to the market

and this low supply, you're in a great financial position. What does this mean for El Paso home buyers? Well, unfortunately it's a little tougher for you. Because it is a very challenging and competitive market.

However, if you wait to buy a home, you're going to pay more for the home, right? Home prices are not going to go down. Now, home prices are not going to continue to increase like we've seen the last couple of years.

It's going to slow. Okay? The demand is going to be squashed because of rising interest rates, inflation, but home prices aren't going to go down.

All right? It is extremely unlikely that home prices are going to come down. If you're waiting for home prices to come down, you should be prepared to rent for a very long time.

Okay? Because that's highly unlikely. If you wait to buy, you're also not going to be able to take advantage of appreciation, which for the next year or two still looks very strong, and you're going to miss out

on buying something for $200,000 and a couple of years later, it being worth a lot more because of appreciation and over that whole time building that equity. So what does the future kind of hold here? Basically, everybody, most experts believe that prices, home prices are going to continue

to rise. Okay? But at a slower pace. Okay?

Now, appreciation is going to slow down. Like I said, last year in El Paso alone, appreciation was 15%. That's going to slow down, but nobody expects homes to start depreciating, right? That's what happens in a housing bubble or a crash, right?

So here's some just statistics about a lot of smart people and what they're guessing appreciation might be over the next couple of years, 2022, this year, 9%. So last year, maybe it was 15, this year, bringing it down to nine, 2023, 4.74, 2024, 3.67, year after that, 3.41, 2026, 3.57.

So now three to 4%, this is the more kind of common or average appreciation percentage. It's just that because of COVID and all sorts of things, housing supply, home builders being blown up, we've seen just remarkable appreciation. But the good thing about that, like I said, is that that does really put homeowners in

a much stronger position now that they're sitting on all of this equity that they've been paying over the life term of this loan. And when you couple that with this kind of incredible appreciation, like I said, if you're an El Paso homeowner, congratulations because your net worth is probably a little more

substantial than you think. So if you are curious about what the equity in your home is in this market, of course, reach out to us. We can evaluate how much equity you have and give you any kind of value add advice that

you might be searching for. So thank you so much and we'll see you next time.