U.S. homeowners have a record amount of equity, but higher interest rates over the past two years have made them reluctant to tap it. That is finally starting to change.
Mortgage holders withdrew $48 billion in home equity in the third quarter of this year, the largest volume in the two years since the Federal Reserve began raising its benchmark interest rate, according to ICE Mortgage Technology. While mortgage rates don't exactly follow the Fed's interest rate, home equity lines of credit, or HELOCs, are tied to it. The Fed cut its key interest rate by half a percentage point in mid-September.
Despite the increase, homeowners are still pretty cautious.
Together they have a total capital of just over $17 trillion. About $11 trillion of that is accessible, meaning homeowners can borrow as long as 20% of equity remains in the home, as most lenders require. The average homeowner currently has $319,000 in equity in their home, of which $207,000 is tappable.
An aerial view of existing homes near new homes under construction (TOP R) in the Chatsworth neighborhood on September 8, 2023 in Los Angeles, California.
Mario Tama | Getty Images
In the third quarter, homeowners withdrew just 0.42% of total available equity, less than half the rate in the decade before the Fed hiked interest rates.
“Over the last ten quarters, homeowners have withdrawn $476 billion in equity, exactly half of what we would expect under more normal circumstances. That equates to nearly half a trillion dollars in unused dollars that have not been returned to the overall economy,” Andy Walden, ICE vice president of research and analysis, said in a press release.
Homeowners tend to use equity for home repairs, renovation projects, and big expenses like college tuition.
Walden has tracked the cost changes over the past two years: The monthly payment required to borrow $50,000 in a HELOC has increased from just $167 in March 2022 to $413 in January of this year more than doubled. The recent interest rate cut has reduced this slightly.
“The market is currently pricing in further cuts of 1.5 percentage points by the end of next year. If this comes to fruition and current spreads remain in place, it will have a positive impact on both new home equity loans and consumers with existing HELOCs.” “With a $50,000 withdrawal, the payout drops back down to under $300 per month,” Walden calculated.
These costs are still above the 20-year average, but are calculated to represent a reduction of more than 25% from recent highs.
“Given borrowers' recent sensitivity to even small interest rate declines, this could lead to further HELOC take-up, particularly when mortgage holders are sitting on record levels of equity and are tied to current home values via low first mortgage interest rates,” Walden added.
Home equity growth has slowed recently as home prices weaken. More supply is coming onto the market and primary mortgage rates are higher than they were in the summer. This gives sellers less pricing power.
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