For most Americans, the house that they reside in is the largest purchase they will ever make. Homeownership is a major part of the American Dream, because not only is this usually a family’s most valuable asset, but it is also the place where they do life together. Las Vegas home equity growth, then, is vital to the decision to buy a home here.

There is wide agreement among most financial experts that purchasing a home is one of the best investments that an individual or couple can make. This is because of the equity that the owner is likely to gain over time as well as the tax benefits.

Home equity is the market value of the house minus what the owner owes on their primary mortgage, second mortgage/line of credit, and any liens on the property. Equity is accumulated in two primary ways. First, as the owner makes monthly mortgage payments, they gradually build equity by reducing the balance of the loan. Second, homes generally increase in value (based on market conditions) as time goes on.

Assuming you are dealing with a fixed-rate mortgage, the first factor is controlled entirely by the homeowner. If you make your minimum monthly payments, the balance you owe will drop each month on a set schedule. If you pay additional principal on your mortgage each month, then you can reduce the balance even faster, depending on how much extra you pay.

The second factor is largely out of the control of the homeowner. The market value of a house is determined by a number of different variables that have to do with the population of a certain area, the jobs available in that area, mortgage interest rates, and several others. 

Housing Market is Indicator of Overall Economy

The housing market is often a reflection of what is going on in the economy. As regional economies heat up, home sales tend to increase accordingly, putting upward pressure on home prices and building additional equity for homeowners in the Las Vegas valley. When economies slow down, demand for housing typically slows as well, which tends to stagnate the value of area real estate.

That is a simple description of the relationship between the economy and home equity. But in reality, this relationship is far more complicated, because there are complex and intertwining economic variables that impact the housing market. For example, it is not as simple as low unemployment equating to higher housing values or vice versa, there are other factors at play here as well.

Economic Factors that Impact Home Equity

Here are some of the key variables that may affect the price of real estate and thus how much equity a homeowner has:

Population/Demographics

Perhaps the biggest driver of housing demand in a particular area is the population and demographic information of those who live there. For example, if the area population is growing and those who are moving in are of working age with younger families, then the demand for homes will be higher. If, on the other hand, the population is shrinking and it is mostly aging and retired people living there, then demand will likely drop.

Household Income

Income is an important variable because it can affect home equity in two ways. On a macro level, the average household income in a particular area will affect how much homebuyers can afford, which in turn will help determine area home prices. 

On a micro level, the personal income of a household determines whether or not the homeowner can afford to pay extra on their mortgage and grow equity faster. Their financial position also affects whether or not they can afford to do any home renovations that could potentially create additional equity.

Mortgage Rates

We have seen this past year how mortgage interest rates affect housing demand and real estate prices. In 2021, buyers were getting historically low interest rates – in many cases under 3% for a 30-year fixed-rate mortgage. As of October 2022, rates are hovering around 7%.

Higher interest rates have cooled housing demand in many areas of the country. This has led to a leveling off of home prices in those areas. We are not seeing a 2008-like crash where home prices actually dropped year-over-year for the first time in decades, but the higher mortgage rates are contributing to a slowdown in the market. 

Inflation

Inflation is one of those complicated variables that can affect home prices in either direction. It is one of the factors that was blamed for the sharp rise in home prices during 2020 and 2021, and the higher cost of construction materials was directly responsible for the increase in new home prices. 

It is a different story in 2022. This year, it can be strongly argued that inflation is one of the factors that is slowing the housing market. 

The main reason that the Federal Reserve is raising interest rates so aggressively (and consequently slowing the housing market) is to combat inflation. In addition, the rising costs of essentials such as food and fuel have outpaced average incomes this year, leaving less disposable income for families who are looking to buy a home.

Unique Factors

During every economic cycle, there are unique factors that impact the housing market and the equity that homeowners possess. For example, after the attack on 9/11/2001 triggered a major recession, the Federal Reserve responded by aggressively lowering interest rates, which eventually trickled down to the mortgage market.

For several years thereafter, mortgages were being handed out at low interest rates with very little scrutiny of buyers in many cases. This artificially inflated home values and home equity, causing many homeowners to over-leverage themselves. In 2008, the housing market crashed hard, and it took several years for home values to recover.

The current housing market is being affected by the aftermath of the 2020 Covid pandemic. And in the midst of all of this, there is a lot of economic uncertainty.

According to Core Logic, home prices in the US increased by 18.3% year-over-year from June 2021 through June 2022. In Las Vegas, the year-over-year increase during this same time period was 24.3%.

These are very sharp increases for just a one-year period, and it is unrealistic to believe that this pace can continue. Core Logic forecasts a far more modest year-over-year increase of 4.3% from June 2022 through June 2023, although some metro areas are at risk of a home price decline.

How Will the Economy Impact Your Home Equity?

The answer to this question depends largely on what area of the country you live in. Per the Core Logic forecast, it is reasonable for homeowners in most parts of the country to expect a mild increase in the part of their home equity that is driven by housing prices. But if you live in Washington, Idaho, the Florida Panhandle, or any of a handful of other metro areas, you could be looking at a decline in prices.

How about Las Vegas? 

Although there has been a slowdown in Southern Nevada’s housing market, things seem to be leveling off for now. But even with slower sales and higher inventories than last year, the median sales price for a single-family home was still around 10% higher than last year. 

Although no one can predict the future with 100% accuracy, there is reason to be optimistic about home values and equity for Las Vegas homeowners in 2023 and beyond. Remember, we are just a couple hours east of LA, and this area has been a major beneficiary of the California exodus. As long as the migration east continues, home values in Las Vegas should remain stable.

Looking to Buy or Sell a Las Vegas Luxury Home? The Knoch Group is Here to Help

Housing prices fluctuate based on economic factors, but as a general rule, the longer you own a home, the more equity you will build in it over time. This is why buying a home it is widely considered to be one of the best investments a family can make.

If you are thinking about buying or selling a home in Summerlin, Spring Valley, Henderson, or any other part of the Las Vegas Metro area, Ryan Knoch of The Knoch Group is ready to go to work for you. Ryan is one of the top Las Vegas luxury home brokers, and he knows the ins and outs of the local real estate market.

Call our office today or message us online to get started.

Ryan Knoch is a Las Vegas real estate broker and member of Las Vegas REALTORS® and National Association of REALTORS®. He provides skilled guidance on the purchase and sale of Las Vegas homes and is a resource for all other real estate matters. To schedule a consultation, call Ryan Knoch today at (702) 303-7946 or email him at ryan@theknochgroupre.com.