Homeowners Utilizing Home Equity for Cash

Amidst robust home values nationwide, homeowners leverage their home equity for renovations and managing debt. The housing market’s low inventory has bolstered home prices, sustaining their surge during the pandemic. This has resulted in a collective home equity of approximately $30 trillion, as the St. Louis Federal Reserve reported.

In response, there has been a 50% increase in Home Equity Lines of Credit (HELOCs) and home equity loan origination in 2022 compared to two years prior, according to the Mortgage Bankers Association. The spike is attributed to a demand for home renovations and remodeling, with nearly two-thirds of borrowers citing this as a motivation for applying for these loans. Other reasons include debt consolidation and emergency cash management.

Home equity loans and HELOCs offer homeowners a valuable source of wealth, secured against the difference between their home’s value and mortgage debt. With rising mortgage rates, these loans provide a lower-interest financing option for major expenses like renovations. Despite the decline in mortgage originations, lenders anticipate an increase in HELOC debt by 8.2% in the current year and 9.9% in 2024, along with an 11.4% increase in home equity loan debt in 2023, as indicated by the Mortgage Bankers Association’s report.

Notably, while total mortgage balances slightly decreased in the second quarter, home equity loan originations surged by 18%, signaling ongoing consumer interest in accessing their home equity.

U.S. Housing Market Sets Record at $47 Trillion in Total Value

In June, Redfin reported that the total value of homes in the U.S. reached a new record of $46.8 trillion, surpassing the previous year’s high of $46.6 trillion. This achievement has helped offset the approximately $3 trillion loss caused by rising mortgage rates between June 2022 and February 2023. The current housing market dynamics, driven by a home shortage, have pushed up prices.

The dominance of the 30-year fixed-rate mortgage has played a significant role in maintaining high home values, according to Redfin Economics Research Lead Chen Zhao. Many homeowners secured advantageous deals with low mortgage rates during the pandemic, incentivizing them to remain in their current homes rather than move and potentially face higher rates. This situation has led to fierce competition among buyers for a limited supply of homes, preventing a sharp decline in home values. While some urban areas experienced drops in aggregate home values compared to the previous year, more affordable markets saw gains, with the most significant increase recorded in Little Rock, Arkansas. The analysis also revealed that millennial homeowners witnessed a 2.9% increase in home values. In comparison, the value of homes owned by the Silent Generation fell by 11.4%, and other generational segments saw marginal or no change in value. Current home values were estimated using the Redfin Estimate, MLS data, and public records.

U.S. Mortgage Applications Decline as Rates Reach 22-Year High

The Mortgage Bankers Association (MBA) has reported a third consecutive week of declining demand for home loans, with mortgage applications dropping by 0.8% on a seasonally adjusted basis and 2% on an unadjusted basis. This decline aligns with a surge in interest rates, notably the 30-year mortgage rate surpassing 7%, reaching the highest rate since 2001 at 7.16%. Refinance and purchase applications both dropped by 2%, marking the lowest point in six months for overall application activity. Rising Treasury rates, driven by mixed inflation data and the economy’s resiliency, challenge the Federal Reserve’s efforts to manage inflation.

Despite these challenges, applications for purchase loans related to newly constructed homes remained robust, exhibiting a 35.5% increase from July 2022. This growth can be attributed to new homes gaining prominence in the market and constituting a more significant portion of available homes for sale. Additionally, there has been a notable uptick in the share of purchase applications backed by the Federal Housing Administration (FHA). This suggests increased interest among first-time homebuyers turning to new homes due to limited existing home inventory and affordability concerns.