Your Home Value May Be Rising—but Equity Erosion Could Wipe Out Those Gains

You may feel richer on paper, but in real terms, you could be falling behind.

Home values are still inching upward, with median list prices rising 0.5% in July, according to data from Realtor.com®. But that’s not the full story. Inflation is climbing at 2.7% year over year—outpacing those modest gains and eroding the wealth homeowners thought they had built.

Housing is often seen as a hedge against inflation, but when home prices don’t keep pace, the purchasing power of your equity shrinks. Put another way: You may have more dollars in your name, but each one buys less. 

And for most Americans, a home isn’t just shelter—it’s their biggest source of wealth. When equity erodes, it can change how, and how well, they live. 

For buyers who hoped they might use this to their advantage, it’s not so simple, either.

“Even if home prices cool, affordability remains strained as inflation and high mortgage rates erode purchasing power,” says Cliff Auerswald, president of All Reverse Mortgage Inc. “Slower price growth doesn’t automatically mean homes are more affordable.”

What is equity erosion?

Equity erosion happens when your home’s value rises, but not fast enough to keep up with inflation. As a result, the real, inflation-adjusted purchasing power of your equity shrinks.

That doesn’t mean your home is losing value in nominal terms. On paper, it might be worth more than last year. But as prices rise across the board, those dollars buy less—whether you’re looking to renovate, borrow against your home, or sell and downsize.

“Your house may still be worth more dollars than before, but those dollars buy less in the broader economy,” explains Hannah Jones, senior economic research analyst at Realtor.com.

Historically, housing tends to outpace inflation, making it a reliable long-term place to park your cash. But that relationship doesn’t always hold in the short-term.

“Over long horizons, housing tends to be an inflation hedge, but the relationship can break down in shorter bursts of high inflation or economic stress,” Jones explains.

That kind of breakdown is exactly what many homeowners have experienced in recent years—a slow erosion of purchasing power, even as home prices go up.

“It’s not catastrophic if inflation briefly outpaces home price growth, especially if you have a fixed-rate mortgage,” says Jones. “But if it persists, it erodes real housing wealth, so homeowners should monitor inflation, diversify their assets, and think about housing as both shelter and part of a bigger financial picture.”

When has this happened before?

This isn’t the first time that the housing market has gone through a period of equity erosion. In 1980, for example, home prices rose 6% year over year, but inflation came in at 13.5%, wiping out real gains for many.

In this period of stagflation, inflation surged while growth stagnated, and mortgage rates spiked as the federal government tried to bring inflation under control by raising interest rates. If that’s ringing any bells, it’s because we’ve been on a similar trajectory.

After a red-hot 2021 and 2022, when listing prices surged by 10.7% and 13.7% respectively, growth slowed to a crawl, and then went into reverse.

In 2023, prices increased just 2.3% year over year. And in 2024, they fell 0.4%. So far in 2025, the trend has continued, with a 0.3% decline on average. A monthly breakdown shows how sluggish the recovery has been: from February through July 2025, national median list prices have barely budged, fluctuating between -0.8% and +0.5% year over year.

Meanwhile, inflation has been far more persistent. In 2022, prices climbed 8.0%, in 2023 they increased an additional 4.1%, followed by 2.9% in 2024, according to data from the Federal Reserve Bank of Minneapolis.

While housing has tended to outpace inflation over the long run, history shows short-term reversals can and do happen—and when they do, they can chip away at the real value of your largest asset.

Why this matters for the housing market

On the surface, rising home values can make homeowners feel more secure. A growing equity cushion suggests financial stability and opens doors to opportunities like refinancing, taking out a home equity loan, or selling to fund retirement. 

But when inflation rises faster than your home’s value, your financial advantage is weakened, and the cost of tapping your home’s value for things like renovations, college tuition, or a new home purchase later on becomes greater.

For buyers, however, this rare trend may offer a sliver of relief, says Melanie Musson, a finance expert with Clearsurance.

“When inflation grows faster than home prices, homes are more affordable,” she says. “It certainly puts those in the market in a better position to afford a home.” 

And if wages manage to catch up to inflation while prices remain relatively flat, it could help level the playing field for buyers who’ve been priced out in recent years.

“Buyers have more negotiating power because the sellers engage in fewer bidding wars and are more flexible in their pricing strategies. In many markets, the barrage of offers over asking price has markedly cooled,” Auerswald says, before adding a caveat.

“Any bargaining power buyers have is usually counterbalanced by elevated borrowing costs and cost-of-living pressures, which result in little to no improvement in affordability.”

It’s a clear illustration of how affordability gains don’t come without trade-offs. 

When prices soften, sellers may be less motivated to list, especially if they’re holding out for bigger profits. Evidence of such a shift may already be emerging. In July, for every 100 new listings added, 21 homes were pulled off the market, according to the July Housing Report from Realtor.com, a powerful signal that sellers are reconsidering their pricing power.

So equity erosion can be a double-edged sword. While it may create small windows of opportunity for buyers, it’s a reminder to owners that nominal value isn’t the same as real wealth.

How to protect yourself

While equity erosion doesn’t mean your home is losing value outright, it does mean you’ll want to be more intentional about protecting your wealth in a high-inflation environment.

“For owners, a fixed mortgage is your built-in inflation hedge,” says Tami Pardee, founder and CEO of Pardee Properties. Unlike rent or adjustable-rate loans, a fixed mortgage locks in your monthly payment, keeping your housing costs stable even if prices rise elsewhere in the economy. 

It’s also a reminder not to treat your home as your only nest egg. Real estate can be a strong long-term investment, but it’s not immune to short-term economic pressures. Diversifying your assets—through retirement accounts, savings, or other investments—can help offset periods when housing underperforms inflation.

Finally, track the difference between nominal gains and real value. Just because your home is worth more dollars today than it was last year doesn’t mean you’re wealthier in a meaningful sense. Paying attention to inflation-adjusted equity can help you make smarter decisions about refinancing, borrowing, or selling, especially if your plans hinge on turning that equity into cash.

The bigger picture

Equity erosion is more than a personal finance issue. It has broader implications for how we think about housing as a long-term investment. Real estate has traditionally been seen as a reliable hedge against inflation, with home prices generally outpacing the rise in consumer costs over time. But when that relationship breaks down, even temporarily, it can shake confidence in housing’s role as a safe store of value.

If inflation continues to rise faster than home prices for an extended period, it challenges the assumption that owning a home always builds wealth in real terms. This shift could influence everything from retirement planning to homebuying behavior, especially for those who treat their home as their primary asset.