As the housing market has continued its recovery, home prices have been climbing at a steady clip across the nation. And that means homeowners now have a nice stockpile of pent-up wealth in their homes.
In fact, as of the fourth quarter of last year, U.S. homeowners had a collective $5.7 trillion in tappable equity, according to Black Knight.
To break it down further, at the end of last year, homeowners amassed nearly $10,000 in equity in one year’s time, according to CoreLogic data.
But it seems fewer people are choosing to access this source of wealth.
Black Knight reported that just 1% of available equity tapped in the last quarter of 2018 –the lowest share since 2012.
That said, it is worth noting that cash-out refinances have seen some action in the last two years.
Freddie Mac data showed that the share of refinances that involved cash extraction climbed to 77% in the second quarter of 2018. But the amount of equity cashed out totaled $15.8 billion – well below the $75-$85 billion we saw in the years leading up to the crisis.
At the same time, the options for tapping equity appear to be growing.
Of course, you have your standard HELOCs and home equity loans and – for seniors –reverse mortgages could be an option.
But now you can also take on a homeownership investor, who will pay you cash for the chance to share in your home’s appreciation. Or, you could work with a sale-leaseback company, which will buy your home but let you live there, so you can essentially access your equity without relocating.
It seems that every quarter a new startup emerges promising to disrupt the home equity space by giving homeowners a better, faster, cheaper or even debt-free way to tap into the wealth in their homes.
And yet, so many Americans appear to be reluctant to take this route.
What gives? We talked to a number of experts for their take.
First, rates clearly play a role. In recent years, the Federal Reserve has nudged rates upward, and this has had an obvious chilling effect on home equity lending.
Andy Walden, Black Knight’s director of market research, said there is a very clear inverse correlation between rising rates and declining equity withdrawals.
“Over the past three years, the Fed has steadily ratcheted up short-term interest rates, which are directly related to rate offerings on home equity lines of credit,” Walden said. “In fact, the introductory rate on HELOCs has risen by more than two percentage points during that time.”
“Then, 2018 saw 30-year fixed rates rise as well,” he added. “With borrowing costs rising, a significant number of homeowners – despite having record levels of equity – are choosing to forego equity withdrawals.”
An additional factor could be the fact that the aging of the Baby Boomer generation has meant that the homeowner population is skewing older, and older homeowners might be more reluctant to take on debt.
CoreLogic’s Chief Economist Frank Nothaft said this could be one of the reasons home equity access appears subdued.
“If you look at the age distribution of homeowners in the United States, the biggest cohort are Baby Boomers, and the median age of a Baby Boomer homeowner is about 60 years of age,” Nothaft said. “Some of them who are still working are probably thinking about retiring and they probably see the equity in their home as one of their wealth assets.”
Zillow Economist Jeff Tucker agreed that the aging homeowner population likely plays a role.
“For many older Americans, their home is their single biggest financial asset, and they may want to keep it unencumbered by loans or reverse mortgages to ensure their heirs will be able to inherit and sell their home easily after they are gone,” Tucker explained.
Tucker also said there may be a culture element at play here.
“I think American homeowners view it as a personal accomplishment and point of pride to have fully paid off their homes,” he said. “Simple ownership is very easy to understand, and many people are reasonably wary of trying to understand unfamiliar financial products such as reverse mortgages.”
Of course, a decade may have passed since the financial crisis, but the memory lingers, and this, too, could influence a homeowner’s decision to leave their equity intact.
“Now we're in an environment where we have a lot of young Millennials who saw what happened with the housing crash, the foreclosure crisis, the great recession, and for many of them, maybe those memories are very fresh,” Nothaft said. “Now that some have transitioned into homeownership, they’re mindful of it and they may be more cautious and avoid second liens or tapping into home equity going forward.”
Walden said there is evidence to suggest memories of the crisis are holding back home equity lending.
“Even before we started to see borrowing costs increase, equity withdrawals as a share of available equity were well below 2004-2008 levels, and borrowers were leaving more equity on the table than they had been prior to the financial crisis,” Walden said.
Will we see more homeowners utilizing their home equity as this memory continues to fade? Maybe, maybe not.
Walden predicts a mixed bag in 2019 based on recent interest rate movement.
“With 30-year rates declining in recent months, equity utilization via cash-out refinances will likely pick up steam, while the headwinds for HELOC lending have actually increased,” he said.
Walden also noted that the average interest rate on a HELOC is about 2.5% higher than the average 30-year fixed rate, and that that’s the largest delta since the crisis.
“This could cause some would-be HELOC candidates to explore a cash-out refinance instead, while others may continue to forego withdrawing equity all together,” he said.
Walden said the borrowing costs for HELOCs and cash-outs may just enhance the appeal of some of the non-traditional equity products that have come to market.
“The record levels of tappable equity available, combined with rising borrowing costs for both HELOCs and cash-out refinances – up until recent interest rate declines, in any case – have certainly opened to the door for non-traditional product entrants that can offer homeowners options to tap into available equity without being tied to underlying short and long term interest rate trends.”
Nothaft pointed out that homeowners are staying in their homes longer than before, and this is likely to spur remodeling activity, which could certainly be funded by home equity.
Tucker said it’s too hard to tell if homeowners will warm up to the idea of home equity access in the years ahead.
“Lower interest rates than this past winter could spur borrowing,” he said. “But falling home value appreciation rates could revive memories of the housing crash and make people more wary.”