American homeowners are doing something surprising: Despite record levels of home equity available – approximately $1.5 trillion worth – they are using it less via home equity lines of credit and cash-out refinancings.
Recession lesson: Less homeowners using home equity
Are people simply becoming more frugal? Or are other forces at work? Economists who are experts in housing aren’t totally sure, but everyone agrees: Homeowner behavior is different from previous years.
Cash-out refinancings utilize the home’s increased equity as collateral to extract money. Following the refinancing, the borrower has a new loan, however with an increased amount of debt on the house.
Home equity lines of credit, or HELOCs, leave the owner’s existing mortgage intact but add a second mortgage that takes the form of a line of credit, allowing the owner to withdraw funds when desired.
Both types of equity extraction have been popular for many years and hit historic highs throughout the housing boom years ten years ago. Recently, however, activity has declined.
Consider: In the final quarter of last year, the lowest share of available equity was withdrawn since 2012, as outlined by Black Knight Inc., a data and analytics company that tracks the mortgage industry. HELOC withdrawals were down 10% in comparison to the same period the year before, hitting the lowest level in nearly four years, while cash-out refinancings were down 21% year-over-year.
The total number of cash-out refinancings “remains much lower than in the previous decade,” according to mortgage investor Freddie Mac. Adjusted for inflation in 2018 dollars, approximately $14.8 billion in net equity was cashed out during the final quarter of last year, down from $20.4 billion a year earlier and dramatically under the $104.8 billion in the second quarter of 2006, near the peak of the boom.
What’s contributing to these declines? Interest-rate movements for certain. Rate swings can discourage owners from making use of their equity.
However some economists debate that interest rates alone aren’t the reason. Sam Khater, chief economist of Freddie Mac, thinks significant numbers of owners are shying away from loading on debt as a result of what they saw or experienced during the Great Recession.
“I think it’s the legacy and the impacts” of the recession “that are still fresh in many people’s minds.”
Millions of owners who had taken out HELOCs during the boom – leveraging their equity to the hilt – ultimately lost their homes in the crash that began in December 2007. Many still have not recovered.
Another factor: Ever since the crash, banks are actually much pickier about who qualifies for equity products and who doesn’t.
Have a questions or concern? Nick, Cindy & Nicholas Davis with RE/MAX Premier Group are here to assist you with all your Real Estate Needs. We are always available at 813-300-7116 to answer your questions or you can simply click here and we will be in touch with you shortly.
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