Aerial view of existing homes near new homes under construction (UPPER R) in the Chatsworth neighborhood of Los Angeles, California on September 8, 2023.
Mario Tama | Getty Images
U.S. homeowners have record net worth, but higher interest rates over the past two years have made them reluctant to tap into that equity. That’s finally starting to change.
In the third quarter of this year, mortgage holders withdrew $48 billion of home equity, according to ICE Mortgage Technology — the largest volume in the two years since the Federal Reserve started hiking its benchmark interest rate. The interest rate will be the same, but the home equity line of credit (HELOC) is tied to it. The Federal Reserve lowered interest rates by half a percentage point in mid-September.
Despite rising prices, homeowners remain cautious.
Together they have a total equity capital of just over $17 trillion. About $11 trillion of that is available, meaning homeowners can borrow funds as long as they retain 20% equity in the home, as most lenders require. Today, the average homeowner has $319,000 in home equity, of which $207,000 is available.
In the third quarter, homeowners withdrew just 0.42% of all available equity, less than half the amount in the decade before the Fed raised interest rates.
“Over the past 10 quarters, homeowners have withdrawn $476B in equity Half the amount of extraction we would normally expect to see. This equates to nearly half a trillion untapped dollars that have yet to flow back through the broader economy,” Andy Walden, ICE vice president of research and analysis, said in a press release.
Homeowners tend to use their equity for home repairs, renovation projects and large expenses such as college tuition.
Walden crunched the numbers on how costs have changed over the past two years: The monthly payment required to take out $50,000 in a HELOC has more than doubled, from as low as $167 in March 2022 to $413 in January of this year. The latest rate cut was a slight reduction.
Cut another 1.5 percentage points By the end of next year. If this were valid and the current spread held, it would be Positive impact for consumers on new equity loans as well as existing HELOCs, $50,000 withdrawal payment falls back below $300 .
By calculation, this cost is still above the 20-year average, but down more than 25% from recent highs.
Walden added: “Given borrowers’ recent sensitivity to modest declines in interest rates, this may attract more HELOC use, especially as mortgage holders hold record equity inventories and pass lower first The lien rate locks in the current value of the home.
Home equity growth has been slowing recently as home prices fall. There is more supply on the market and primary mortgage rates are higher than they were during the summer. This leaves sellers with less pricing power.
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