In recent years, U.S. homeowners have accumulated an unprecedented amount of equity in their properties, a phenomenon attributable to a booming real estate market. However, the past two years have seen a remarkable increase in interest rates, a factor that has fostered hesitance among homeowners to tap into this hard-earned equity. While the Federal Reserve’s decision to raise interest rates has often influenced market behaviors, a recent shift has sparked renewed interest in leveraging home equity.
The third quarter of this year marked a pivotal moment, as mortgage holders withdrew an impressive $48 billion from their home equity, the highest figure seen since the onset of the Federal Reserve’s rate hikes. Such a surge indicates a potential change in homeowners’ attitudes toward accessing their equity, despite the caution that has characterized their behavior in recent years.
Home equity is a significant financial asset for many homeowners, and while the aggregate value currently exceeds $17 trillion, only a portion of that is considered tappable. Specifically, about $11 trillion of this total is available for homeowners to borrow against, provided they maintain at least 20% equity in their homes, a common stipulation among lenders. With the average homeowner sitting on approximately $319,000 in equity, the immediate question arises: Why have homeowners only accessed a small fraction of that wealth?
During the third quarter, homeowners withdrew only 0.42% of their tappable equity, a figure less than half the pre-rate hiking average. This modest figure surprises many, prompting industry experts, like Andy Walden of ICE Mortgage Technology, to reflect on the broader economic implications of such restraint. Over the last ten quarters, homeowners have extracted around $476 billion in equity, a stark contrast to what would be expected under more favorable economic conditions, leaving a significant $500 billion untapped.
Homeowners typically utilize home equity for essential expenses, including renovations, home repairs, and significant life events like education costs. However, pursuing a home equity line of credit (HELOC) comes with financial implications. The costs associated with HELOCs have risen dramatically, as evident from the staggering increase in monthly payments for a typical $50,000 withdrawal, which doubled from $167 in March 2022 to $413 in January of the following year.
Thankfully, the recent interest rate cut has provided some relief, reducing payments slightly and presenting a more attractive borrowing landscape. The market anticipates further rate cuts, projected to yield another 1.5 percentage points by the end of next year. Should these estimates materialize, the easing payment structure could incentivize homeowners to begin using their equity more liberally again.
Despite the modest uptick in HELOC activity, homeowners remain cautious in their approach to leveraging their equity. Many are still tethered to low original mortgage rates, a condition that solidifies a preference for maintaining their existing financial arrangements. They are acutely aware of the balancing act between utilizing their home equity and preserving the benefits of their current mortgage terms.
While some experts believe that dipping into home equity could stimulate economic growth as these funds flow back into the market, a concurrent moderation in home equity growth suggests that the market is shifting. With rising inventory and steady mortgage rates, sellers may find themselves with reduced negotiating power, indicating that property values are beginning to stabilize.
While recent indicators suggest a growing willingness to tap into home equity, homeowners are navigating this terrain more cautiously than ever. The interplay between interest rates, home values, and economic conditions will ultimately dictate how and when homeowners decide to utilize their equity, but the current landscape represents an interesting dynamic in the ever-evolving real estate market.