Generally, when people don't have as much equity as they think, they feel less wealthy. They are less likely to spend money. This lowers GDP, which can lead to recessions (although they changed the methodology to not measure a recession by GDP so maybe this part isn't applicable.) Velocity of money decreases, which is deflationary. Also, if someone is told they have equity by a bank of "X" amount, homeowners can (and they have over the past 2 years at record levels) borrow against their house. The HELOC's are generally variable rate mortgages and up to 80% of the "appraised" value. This increases payment, and depending on the homeowners financial position, they could be in trouble. As much as most on BP would like to think that most people are taking out HELOC's for investment properties, the reality is the money is taken out for leisure.
With interest rates where they are now (owner occupied >7%), home prices can not rise further from here. If rates go back lower, then sure, prices can rise. But based on the facts now, and what we are being told by the FED, home values will not rise. I personally think median home values in the country will drop 20-30% and then stagnate until interest rates get cut again.
Yes, if you bought a house to live in for 30 years and never sell then price is irrelevent because you need a place to live and you can make the payment. A mistake will be to call up the bank though, get an appraisal, and feel like you have a windfall allowing you to rack up credit card debt because as a last resort, in your mind you have 'home equity" as a safety net.
Contrary to what most people will say, buyers have more options than sellers. Buyers are already living somewhere, so it's not like if they don't buy they will be on the streets. However, think of it like this, lets say your next door neighbor passes away and their family sells the house. They list their house at a price an "appraisal" thinks the home is worth (this is also numer you base your equity on", but they get no offers at this price level (buyers simply can't afford the payment) because rates are above 7%. These people need to sell though, and because home value went up so high they have room to lower without coming out of pocket. Someone makes an offer for 25% below asking, and they accept. This sale goes on the books (not as a foreclosure.) Your other next door neighbor gets laid off and can no longer make the payment, they decide to move in with family. They have 2 months reserves to pay the mortgage but beyond that they risk foreclosure, they need to sell (same as before.) This all snowballs quickly across markets all across the country.
The shortage in housing is both temporary and partially an illusion. If it weren't an illusion you would have gainfully employed people living on the streets. Apart from some major cities, I don't see that happening.
Over the next few months people will take the bait and buy in at these high prices. the longer rates stay higher though, the pool of qualified buyers will be depleted, and if the fed doesn't cut rates at this point, then the prices start to come down and fast.
@JD Martin is a little insulated in his small town Tennessee bubble. He has a good thing going on there, i'm talking about the major metro markets where most of the population lives. His market before covid people were people making $10 an hour. These people now make probably $20 and can afford higher rents.
