A full decade after the 2008 financial crisis, 2018 began in the U.S. with rising property prices, historically low mortgage rates and a housing market which favored buyers. By the end of the year, however, home price growth faltered and interest rates hit their highest level in almost eight years. The end of last year also saw something the U.S. market hadn’t seen for a while: Less homeowners tapping into their home equity through home-equity credit lines and cash-out refinancings since 2012.
So why is that the in the U.K. there was a dramatic rise in equity release by over 55%, while in the U.S., home equity lines of credit (HELOCs) hit their lowest level in almost four years, down 10% from the previous year, and cash-out refinancings fell 21% on an annual basis?
HELOCs have proven to be a useful source for Americans to access the value in their homes. During the housing boom leading up to the financial crash, Americans withdrew more than $1 trillion in home equity. According to Equifax, the average home equity line in October 2006, while home prices were booming, was just above $100,000. In 2012, lines averaged $90,000. Borrowers doing cash-out refinances in 2018, which accounted for 62% of all refinances, withdrew just $68,000.
Despite the amount of home equity rising steadily since it stuttered at around $6 trillion from 2009 through 2011, Americans are tapping into their home equity less than before. According to The Washington Post, an estimated $14.8 billion in net equity was cashed out during the final quarter of 2018, falling from, according to Freddie Mac, $20.4 billion in 2017. For comparison, in the second quarter of 2006, when home prices were peaking, approximately $104.8 billion was cashed out.
One factor contributing to the decline in popularity is tax law changes limiting deductions on HELOC interest payments. Although, this is relatively recent, only coming into effect this year, leading companies such as Home Equity Wiz are having to deal with a new challenge.
Since the crash, banks have been forced to be pickier over who qualifies for equity products. Home values may have been rising, but the number of people qualifying or the amounts available have not necessarily risen in tandem.
The obvious reason for the decline in popularity of home equity schemes, however, are interest rates. With the Federal Reserve resisting President Trump’s calls for a rate cut from the 2.25% to 2.5% hit this year, mortgage rates have been steadily rising since 2012, when the historic low for 30-year rates was 3.31%. The 30-year fixed mortgage rate in May 2018 stood at 4.61%. Last week, the rate stood at 4.06%. Rate swings have the effect of discouraging homeowners from tapping into their equity. The variable rate on a HELOC makes it riskier as the Fed has been steadily raising rates, which HELOCs follow.
The housing crash may have been over a decade ago, but Americans have good long-term memories. The hurt from the housing market is still sore for some. A tight housing supply and tepid income growth continue to add pressure upon housing activity, and consumer expectations for home price growth over the next year have tempered.
Fears of overheating in the market are compounded by the fact a large portion of today’s newer homeowners witnessed their parents lose houses or suffer heavily from the crash. As sales slow, prices rise and interest rates remain uncertain, the red flags being waved mean that while Americans are far from out of love with home equity lines, they are showing more caution than before.
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