U.S. homeowners hold a record amount of equity, but high interest rates over the past two years have made them reluctant to tap into it. This is finally starting to change.
In the third quarter of this year, mortgage holders withdrew $48 billion in home equity, according to ICE Mortgage Technology — the largest amount in two years since the Fed began raising its benchmark interest rate. While mortgage rates don't exactly follow the interest rate set by the Federal Reserve, home equity lines of credit, or HELOCs, are tied to it. The Federal Reserve cut interest rates by half a percentage point in mid-September.
Despite the bump, homeowners are still very cautious.
They're sitting on just over $17 trillion in total stocks collectively. Nearly $11 trillion of that amount is exploitable, meaning homeowners can borrow from it as long as 20% equity remains in the home, as most lenders require. The average homeowner now has $319,000 of equity in their home, of which $207,000 is at stake.
An aerial view of existing homes near new homes under construction (UPPER R) in the Chatsworth neighborhood on September 08, 2023 in Los Angeles, California.
Mario Tama | Getty Images
In the third quarter, homeowners withdrew just 0.42% of all exploitable equity, less than half the rate seen in the decade before the Fed hiked interest rates.
“Over the past 10 quarters, homeowners have extracted $476 billion from equity, exactly half the extraction we would expect to see under more normal conditions. This equates to nearly half a trillion dollars untapped that has not flowed back through the broader economy.” Andy Walden, vice president of research and analysis at ICE, said in a press release.
Homeowners tend to use equity for home repairs, renovation projects and large expenses, such as college tuition.
Walden looked at cost change numbers over the past two years: The monthly payment required to take out a $50,000 HELOC doubled from $167 in March 2022 to $413 in January of this year. The recent interest rate cut has brought that down a bit.
“The market is currently pricing in reductions of another 1.5 percentage points through the end of next year. If that pays off, and current disparities persist, it will have positive implications for both new equity lending as well as for consumers with existing HELOCs, with a lower payment on withdrawal of $50,000.” To less than $300 a month,” Walden calculates.
This cost is still higher than the 20-year average, but represents a decline of more than 25% from recent highs, according to the calculations.
“Given borrowers' recent sensitivity to even mild declines in interest rates, this could create the temptation of additional HELOC use, especially as mortgage holders hold record stocks of equity and are locked into their current home values by low first lien rates,” Walden added.
Home equity growth has moderated recently, with home prices declining. The market is oversupplied, and initial mortgage rates are higher than they were during the summer. This gives sellers less pricing power.
