Confusion Kills Confidence: Borrowers Underestimate Home Equity

Research done by Fannie Mae shows that although home prices continue to rise, many homeowners and borrowers alike continue to underestimate the amount of equity they have in their homes.

According to a recent Redfin report from Steve Deggendorf of Fannie Mae, misinformed homeowners and borrowers may be less likely to refinance their mortgages, apply for home equity loans, or even buy new homes.

Because housing prices have continued to rise since 2012, just as reductions in home prices pushed some homeowners underwater, the rising of home prices would be expected to reduce the number of underwater households as well as raise the number of households with substantial home equity. Even though this has proven to be the case according to research conducted by CoreLogic, Deggendorf shares that many consumers are not aware of this fact.

Each month, Fannie Mae’s National Housing Survey conducts interviews with homeowners about their thoughts and attitudes for owning and renting a home as well as home and rental price changes and the economy.

What was found from this research in the recent month was despite continuing growth in housing prices, the percentage of homeowners who believed they were underwater has remained pretty consistent. This contradicts research conducted by CoreLogic which states that with the increase in home prices, the amount of homeowners underwater has decreased. When Fannie Mae asked homeowners to compare their total mortgage debt to the value of their home in December 2014, it was found that 23 percent of these homeowners believed that they were underwater. Research conducted in 2015 revealed this perception of homeowners believing themselves to be underwater increased to 24 percent while. This vastly contrasts the estimate from CoreLogic which states that only an estimated 7 percent of homeowners were in fact underwater.

“The idea is not to take on unnecessary mortgage debt or unsustainable behavior, but to be better informed to make major life decisions,” states Deggendorf in his report. “What’s more, reducing the gap between perceived and actual home equity has the potential to remove a barrier that may have hindered housing market activity in general and could create a virtuous cycle that is sorely needed in today’s market.”