Should you worry about decreasing home values?

A view of houses along a suburban street beneath an overcast sky.Image: A view of houses along a suburban street beneath an overcast sky.
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Rising interest rates on mortgages have sidelined potential homebuyers and weighed on the U.S. real estate market — with home prices posting five consecutive months of declines as measured in the most recent Case-Shiller National Home Price Index.

Market conditions may cause your home’s value to slip — or at least slow its appreciation. And if prices fall, you could lose some home equity, which is the difference between what you owe on your home and what it’s now worth.

But that’s not necessarily cause for immediate concern, unless you need to tap into your home equity or plan to sell your home in the near future.

We’ll review why your home value may drop, as well as steps you can take if increasing your home equity is an immediate financial goal for you.

Key takeaway: Unless you plan to sell or borrow against your home soon, there’s probably little reason to be concerned about a small decrease in your home’s value.

Why your home value may drop

There are several factors that can affect the value of your home — including many that you can’t control. Here are some of the common reasons that home values fall.

  • Mortgage rates — The Federal Reserve has raised its benchmark interest rate eight times since March 2022, putting upward pressure on mortgage rates. Rising mortgage rates can reduce demand, which can lead to a drop in home prices.
  • Local market conditions — Supply and demand help drive housing market values. According to a recent Zillow report, 2023’s hottest markets include Cleveland, Pittsburgh and Charlotte, N.C., while San Jose, Sacramento, Minneapolis and Denver are expected to cool.
  • The home’s condition — Maintaining your house, including the landscaping, exterior and interior paint, HVAC systems and plumbing, can help prevent it from decreasing in value as it ages. 

What happens when home equity falls

Having less equity isn’t necessarily an immediate concern, especially if you plan to live in your home for a while. But it could affect your options if you want to sell soon or borrow against your equity with a home equity loan or home equity line of credit. 

What impacts home equity?

  • Declining housing market — If you bought at the peak and the market dips, you may lose some equity. But remember that a loss of equity isn’t necessarily the same thing as being “underwater.” But a large dip in equity can cause you to become underwater on your mortgage, meaning you owe more on your mortgage than what your home is worth.
  • Mortgage amortization — Building equity takes time. At the beginning of your loan term, most of your monthly mortgage payment is going toward paying interest rather than paying down the loan principal. You can use our loan amortization calculator to explore how different loan terms affect your payments and the amount you’ll owe in interest.
  • Small down payment If you took out a loan without putting much down, you can find yourself “underwater” with negative equity if the market drops.

How to build home equity

Paying down the principal balance (and not just the interest owed) on your mortgage and generally increasing your home’s market value are two ways to help you build equity. 

  • Make extra payments. You can pay off your mortgage early by making additional payments beyond your minimum. Paying down your principal directly can bolster your equity if you’re not underwater, which can make a big difference early on in your mortgage when a majority of your regular payment goes toward interest.
  • Make home improvements. Making upgrades and adding certain amenities can increase your home’s value, which can build equity. You’ll want a clear idea of what can directly impact your home’s value though before you devote funds to home improvement projects.
  • Get a mortgage with a shorter term. If you’re actively buying a home or refinancing, you can choose a 15- or 20-year mortgage rather than a 30-year mortgage. Shorter-term mortgages build equity more quickly and can help you save on interest costs over the life of the loan — note that a shorter-term loan typically costs more because you’re shortening the time to pay off the principal of the loan. A mortgage calculator can give you an estimate of the monthly mortgage payment you could pay, including property taxes and insurance.
  • Wait for the market to improve. If you’ve lost equity from a drop in the market, you can simply wait out the downturn. Since 1991, the average annual home price increase has been 4.3%, according to the Federal Housing Finance Agency. Since 2012, the average rate has been 7.7%.

About the author: Brad Hanson is a senior editor at Credit Karma. His 30 years of experience in print and digital media includes work for the Los Angeles Times-Washington Post News Service, and Polyvore. Most recently before… Read more.