Americans have more equity in their homes than ever before.
Total U.S. home equity rose nearly 20% in the first quarter to $27.8 trillion, a record high, according to the Federal Reserve.
The increase is another consequence of a hot housing market. Double-digit price increases have driven some potential owners out of the market. At the same time, rising home values are boosting the finances of Americans who already own them.
Yet rising rates have made it more expensive for homeowners to use that equity, the difference between a property’s market value and the mortgage balance.
About 60% of equity was withdrawn via cash refinances in 2021, according to mortgage data firm Black Knight. Homeowners will likely turn to home equity lines of credit, said Andy Walden, vice president of corporate research strategy at Black Knight. Borrowing costs for these products are more closely tied to the Fed’s benchmark rate, which has moved less than mortgage rates this year. The Fed is expected to raise rates further at its meeting this week.
With home equity lines, borrowers pay interest on the amount of credit they use; With a cash-in refinance, the money taken out of the home is added to the current mortgage, meaning the new rate is applied to a higher balance.
The amount of actionable equity grew by a record $1.2 trillion in the first quarter of 2022, to more than $11 trillion, according to Black Knight. Nearly 75% of it belongs to borrowers with mortgage rates below 4%, according to data from Black Knight. The rate on a 30-year fixed-rate mortgage averaged 5.23% around the start of June, according to mortgage giant Freddie Mac.
Black Knight defines exploitable equity as the amount homeowners can borrow while retaining at least 20% of their home’s equity. According to Black Knight, the average free capital available to Americans with mortgages hit a record high of $207,000 in the first three months of the year.
Despite forecasts of a housing market cooling in 2022, U.S. home prices are still at record highs, even with mortgage rates soaring in recent months. The WSJ’s Dion Rabouin explains what is driving demand, evidence of a slowdown on the horizon and what it could mean for the economy. Photo composition: Ryan Trefes
There’s never been any workable equity, but it’s just getting more expensive to borrow against the equity in your home, Walden said.
Home equity generally increases along with home values over time. In the United States, total equity fell about 42% between 2005 and 2012, when millions of Americans ended up owing more on their mortgages than their homes were worth. Total equity has been rising steadily since 2012, and the 20% jump in the first quarter is the biggest since 2013.
Equity gains are expected to trigger a record amount of home improvement spending this year, according to CoreLogic Inc.
Steve English decided to take out a home equity loan of about $80,000 this spring to replace the roof and deck of his home in Eatonville, Washington. Mr English had considered the home improvement works a few years ago when the terrace would have cost around 40 per cent less, he says, but he does not have enough equity to borrow against.
His home is worth more than $700,000, according to an appraisal conducted this year by his home equity lender, Discover Home Loans. That’s more than double the $325,000 he paid in 2016.
My home equity has skyrocketed over the past two years, Mr. English said. It certainly influenced my decision to exploit it.
The increase in equity provides another business opportunity for the mortgage industry, which is suffering from a decline in volume in the blockbuster mortgage markets of 2020 and 2021.
This year, mortgage lenders are struggling to cope with a sharp drop in the number of homeowners refinancing their loans, with demand drying up as interest rates rise.
Write to Orla McCaffrey at [email protected]
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