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The new disconnect between mortgages and house equity

Our FRED graph above looks at what U.S. households own and owe in terms of real estate: The blue line represents households’ total equity in real estate as a share of GDP, and the red line represents households’ total mortgage debt as a share of GDP over the same time period.

Household equity and mortgage debt generally moved in tandem before 2007. However, this comovement breaks down after the 2007-2009 financial crisis. Right before the financial crisis, property values began to fall; and, for a few years, total real estate equity fell below total real estate debt. The fall in housing equity reversed after 2012 and has been continuing on its rising trend even as we write this post. Total mortgage debt, on the other hand, has fallen consistently since the 2007-2009 financial crisis.

The graph above shows the ratio of equity to mortgage debt: From 1993 to 2005, the ratio of equity to mortgage debt was around 1.5 on average. After the housing crisis, this ratio bottomed out at 0.83 in 2012 before surging to 2.34 as of 2022, a level not seen since 1960.

This phenomenon may have arisen from changes in the financial sector’s lending capacity, whether from regulation or risk attitude. It could also indicate a change in the ownership structure of houses: It may be that houses were accessible only—or mostly—to people who took out a mortgage, but now they can be owned by people who have enough equity to bypass external financing.

How this graph was created: Search FRED for “Owners’ equity in real estate” and select “Households; Owners’ Equity in Real Estate, Level.” Go to the “Edit Graph” panel in the upper right corner to open the “Edit Line” box. Scroll down to “Customize data.” In the text box, search for “gdp” and select “Gross Domestic Product.” Click “Add” next to the text box. Below this section, in the “Formula” space, enter a/b and click “Apply.” Next click the gray “ADD LINE” box at the top. In that search box, search for “Household Mortgages” and select “Households and Nonprofit Organizations; Total Mortgages; Liability, Level.“ Scroll down to “Customize data”: Search for “gdp” and select “Gross Domestic Product.” Click “Add” next to the text box. Below this section, in the “Formula” space, enter (a/1000)/b and click “Apply.”

Suggested by Yu-Ting Chiang and Jesse LaBelle.

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