The ability to build home equity is often touted as one of the primary benefits of homeownership, and home equity in general accounts for a major portion of homeowner net worth. So shouldn’t the recent increases in household equity (page 6 of April Chartbook) be welcome news for homeowners, especially those whose houses’ value dropped significantly during the recession? The answer is yes, but with three caveats.

House price increases vary significantly across the country

According to CoreLogic’s House Price Index, nationwide house prices have risen by nearly 30 percent recently, after falling by 32 percent between 2006 and 2009. But despite these gains, nationwide house prices would have to rise by an additional 14 percent from today’s levels to reach their 2006 peak. (Remember, if home prices fall 50%, they need to rise 100% to get back to their previous peak).

More concerning, however, is the fact that several hard-hit areas such as Phoenix, AZ or Riverside, CA – both of which experienced house price declines of more than 50 percent – are still a very long way from reaching their 2006 peak. House prices in both these metros would have to rise by more than 40 percent from current levels before they can reach 2006 levels again. In fact, 12 of the largest 15 metropolitan areas (April Chartbook page 17) have yet to reach their 2006 peak, indicating that a large number of properties in these areas still remain underwater.

Mortgage debt has fallen because of overly tight credit

Rising home prices are great news for existing homeowners. The problem is – it has been extremely difficult to become a part of that group in recent years because of extraordinarily tight lending standards. Investors scooping up distressed properties in all-cash sales during the recession also contributed to the decline in mortgage debt outstanding. Not surprisingly, household mortgage debt outstanding has declined every year between 2007 and 2014 according to Federal Reserve Flow of Funds data. While rising home prices have been the major factor in household equity outpacing debt, declining levels of mortgage debt have also played a role.

More people are renting now than ever before

The impact of tight credit standards is felt the most by borrowers with lower credit scores, such as younger and low-income borrowers, first time home buyers and former home owners. High unemployment and lower household incomes have made it even more difficult for these borrowers to qualify for mortgage credit. For these reasons, demand for renting has grown tremendously in recent years, mostly at the expense of home ownership, which has fallen consistently from a peak of 69 percent in 2006 to 64 percent at the end of 2014, according to the Census Bureau. The result is less demand for mortgages and declining levels of overall mortgage debt.

What a healthy housing market looks like

One measure of healthy housing markets is moderate appreciation in house prices coupled with similar increases in mortgage debt, as new homeowners enter the market and existing homeowners “trade up” to larger homes, taking out larger mortgages. Though the precise relationship between home equity and mortgage debt will fluctuate depending on market conditions, in a healthy market, increases in house prices have historically resulted in increases in debt levels also. In fact, this relationship between house prices and mortgage debt was intact during the 1990s and the early 2000s.

At year-end 2014, total household mortgage debt outstanding was roughly $9.9 trillion and remained steady, while household equity was $11.8 trillion and rising. The recent increase in house prices without corresponding increases in homeownership and mortgage debt is not only a sign that housing markets are far from healthy, but is also another reminder of how tight today’s lending standards are. Decisions by Fannie Mae and Freddie Mac to purchase mortgages with loan-to-value ratios up to 97 percent, as well as 0.5 percent mortgage insurance premium cut announced by the Federal Housing Administration in January 2015 should certainly improve credit availability in the coming months. However, whether these steps will reverse the recent declines in mortgage debt is still an open question.