Home equity
From Wikipedia, the free encyclopedia
Home equity is the homeowner's financial interest in their property, calculated as the difference between the property's current market value and the total outstanding balances of all loans secured by the home.
In the United States, it is a major source of wealth accumulation with the majority of middle class wealth being held in home equity which totals over $35 trillion overall.
Home equity is defined as the market value of a homeowner's unencumbered interest in their real property, that is, the difference between the home's fair market value and the outstanding balance of all liens on the property.[1] It is summarized by the accounting identity, value − debt = equity. In economics, home equity is sometimes called real property value.[2]
Homeowners acquire equity in their home from two sources. They purchase equity with their down payment and the principal portion of any payments they make against their mortgage. Definitionally, this results in the immediate creation of home equity in the amount of the down payment at the time of purchase with equity increasing with each payment (in cases of standard amortizing loans).[3] The property's equity increases as the debtor makes payments against the mortgage balance.[1]
Equity also increases as the property value appreciates as the value of the property increases while the debt remains unchanged.[1] Conversely, home equity may decrease on a property should valuations decline. In extreme cases, this can result in negative equity, often referred to as mortgages which are "underwater" or "upside down".[4] In 2012, approximately 20% of mortgage holders were underwater; negative equity was most concentrated in Nevada where 61% of mortgages were upside down.[5] Arizona (48%), Florida (44%), Michigan (35%), and Georgia (33%) also all showed a high percentage of homeowners with negative equity.[5] Negative equity greatly increases the risk of foreclosure and default since a home sale will no longer fully cover the debt.[6]
Home equity is illiquid.[7][8] As wealth on paper and not cash in hand, it cannot be readily spent or used for purchases in its current form. An owner must typically sell the property or utilize it as collateral through home equity release products to convert equity into liquid funds.[9]
Home equity in the United States
As of March 2025, homeowners in the United States have over $35 trillion in home equity according to the Federal Reserve Bank of St. Louis.[10][9]
Since the mid-1900s, home equity has been the primary strategy for the American middle class to build household wealth.[11] In most Americans' portfolios, their home is their largest asset.[12] According to the 2016 Survey of Consumer Finances, home equity contained in households' primary residence accounted for approximately a quarter of their overall assets.[13]
Rise in home values and its use as a "forced savings plan" contribute to record wealth disparity between homeowners and non-owners with homeownership viewed as a key part of the American Dream separating the middle class from the poor.[14][15][16][17] Home equity represents between 50% and 70% of net wealth for Americans in the three middle income quintiles.[11] In the aggregate, home equity accounts for 43% of net worth for the median household.[18] At the turn of the century, home equity's median share of net wealth among households with positive net worth was 27.2% with an average of 35.3%.[19]
The median net worth among homeowners was approximately $400,000 in 2024 compared to $10,000 for renters.[20] This gap has widened over time, nearly doubling (growing by ~70%) between 1989 and 2022.[14] Retention of net worth held in home equity has historically enabled intergenerational wealth transfer and played a key role in intergenerational wealth accumulation.[21][22] Broad homeownership enabled by the G.I. Bill following World War II allowed the accumulation of home equity which developed the middle class and enabled generational wealth transfers.[23][24][25]
Home equity's function as forced savings over the life cycle, results in older homeowners often have substantial home equity, whereas renters tend to have very low wealth in later life, with the gap peaking by retirement for those who own homes.[26][27][28] Home equity release products can help retirees access home equity creating additional income and improve retirement security.[29]
Property buyers typically look to purchase properties that will grow in value, causing the equity in the property to increase, thus providing a return on their investment when the property is sold.[30] Pessimistic buyers typically opt for higher leverage through smaller downpayments to limit financial exposure when household needs dictate property size; this pattern is especially pronounced in markets with lower default costs or during anticipated housing downturns.[30]