posted on 27 March 2016
-- this post authored by Frank Nothaft
After years of falling volume, home equity lending is making a comeback. For the past two years, origination volumes have been trending sharply higher as more homeowners benefit from home price appreciation and more lenders see opportunity in the loan segment.
During the first nine months of 2015, lenders approved nearly one million new home equity lines of credit with an aggregate credit limit in excess of $115 billion.
Also known as a HELOC, new approvals during 2015 were on pace to be the largest amount since 2008, and more than double the volume just three years ago. Despite this pick-up, the HELOC market in 2015 was still less than one-half the volume in 2006. But there are clear signs that improving home values and better loan performance are converging to increase loan demand and product availability.
Two factors driving the growing consumer interest in HELOCs are the growth in home equity and the desire of homeowners to keep their low-interest-rate first mortgage. Home-value growth is the primary building block for home equity, and the CoreLogic Home Price Index for the U.S. has found an average 36 percent appreciation from its 2011 trough. These value gains have fueled the $6 trillion increase in home equity since mid-2011. Further, there has been a large increase in owners with at least 25 percent equity in their home, meaning that they have sufficient equity built up to prudently tap into a part of it with a home equity loan. Today, more than 60 million homes are either owned 'free and clear' of debt or the owner has at least 25 percent equity (Exhibit 2). That's an increase of more than 10 million homeowners with at least 25 percent equity since the Great Recession.
In the past, homeowners looking to tap the equity in their homes might also have considered a cash-out refinance of their first mortgage. But over the past few years the vast majority of current home owners have already taken out a new mortgage with a very low interest rate. The average rate on residential mortgage debt outstanding was 3.8 percent at the end of 2015. Rather than refinance, homeowners can consider using a HELOC to convert equity into cash for home improvements or other needs.
The recent resurgence in home equity lending may be a driver of remodeling expenditures by homeowners. Remodeling spending has increased 27 percent during the past three years, concurrent with the pickup in home equity lending (Exhibit 3). This spending is equivalent to homeowners making investments in their homes and is part of housing's contribution to economic growth.
1 From its March 2011 trough, the CoreLogic HPI for the U.S. has risen 36 percent through December 2015.
2 Federal Reserve, Z.1 table B.101; December 10, 2015, owner-occupied single-family.
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