American homeowners have record amounts of equity, but rising interest rates over the past two years have made them reluctant to use it. That is finally starting to change.
Mortgage holders withdrew $48 billion in home equity in the third quarter of this year, the most in two years since the Federal Reserve began raising benchmark interest rates, according to ICE Mortgage Technology. It became the amount. While mortgage rates don’t exactly follow the Fed rate, home equity lines of credit (HELOCs) are tied to the Fed rate. The Federal Reserve cut interest rates by 0.5 percentage points in mid-September.
Despite the conflict, homeowners remain quite cautious.
They collectively hold a little over $17 trillion in stocks. About $11 trillion of that is available, and homeowners will be able to borrow against it as long as they have 20% equity left in their homes, as most financial institutions require. Currently, the average homeowner has $319,000 in equity in their home, with $207,000 of that available.
Aerial view of existing homes near new homes under construction (Upper R) in the Chatsworth neighborhood of Los Angeles, California, on September 8, 2023.
Tama Mario | Getty Images
Homeowners withdrew only 0.42% of the total available equity in the third quarter, less than half the percentage seen in the decade before the Fed rate hike.
“Over the past 10 quarters, homeowners have withdrawn $476 billion in capital, just half of the withdrawals we would expect to see under more normal circumstances. That’s nearly $5 trillion in unfunded and unused resources,” Andy Walden, ICE’s vice president of research and analysis, said in the release.
Homeowners tend to use equity for large expenses such as home repairs, renovation projects, and college tuition.
Walden crunched the numbers on how costs have changed over the past two years. The monthly payments required to withdraw $50,000 on a HELOC more than doubled from a minimum of $167 in March 2022 to $413 in January of this year. With the latest rate cut, that amount has decreased slightly.
“The market is currently pricing in another 1.5 percentage point rate cut by the end of next year. If that happens and current spreads are maintained, it will be beneficial for both new equity loans and consumers with existing HELOCs. “The payout for a $50,000 withdrawal would be less than $300 per month,” Walden calculated.
While this cost is still above the 20-year average, calculations show that it has been reduced by more than 25% from recent highs.
“Given that modern borrowers have become more sensitive to even the slightest interest rate decline, especially as mortgage holders hold record equity and are locked in to current home values with low first lien rates, “This could encourage more HELOC usage if you have one,” Walden added.
Growth in housing wealth has slowed recently as house prices have fallen. There is more supply on the market and mortgage rates are higher than they were in the summer. This reduces pricing power for sellers.
