US homeowners begin to tap into real estate capital as rates change

An aerial perspective of existing homes alongside new construction in the Chatsworth neighborhood of Los Angeles on September 8, 2023, highlights a significant moment in the real estate market.

Recent data indicates that U.S. homeowners have a significant amount of home equity, but soaring interest rates over the past two years have made many reluctant to tap into that value. This trend, however, appears to be changing.

In the third quarter of this year, homeowners accessed $48 billion in home equity, marking the highest volume of withdrawals in two years, following the Federal Reserve’s interest rate hikes. While mortgage rates do not directly follow Fed adjustments, home equity lines of credit (HELOCs) are affected. Notably, the Fed lowered rates by half a percentage point in mid-September.

Despite this increase in withdrawals, many homeowners remain cautious about tapping into their equity.

Currently, U.S. homeowners boast a collective net worth of more than $17 trillion, of which approximately $11 trillion is classified as selectable equity. This means that homeowners could potentially borrow this amount, as long as they maintain at least 20% equity in their homes, which is a common requirement among lenders. The average homeowner now has about $319,000 in equity, of which about $207,000 is accessible for borrowing.

In the third quarter, homeowners used just 0.42% of their selectable equity, significantly lower than the average withdrawal rate seen in the decade before the Fed’s interest rate hikes.

According to Andy Walden, vice president of research and analytics at ICE Mortgage Technology, homeowners have withdrawn a combined $476 billion over the past ten quarters. This figure is only half of what would normally be expected under more favorable economic conditions, or almost half a trillion dollars not yet reinvested in the economy.

Homeowners generally allocate their equity for various purposes, including home improvements, renovations, and significant expenses such as college tuition.

Walden analyzed the evolution of finance costs over the past two years, revealing that the required monthly payment for a $50,000 withdrawal through a HELOC has more than doubled, from $167 in March 2022 to $413 in January this year . The recent rate cut has alleviated these costs somewhat.

“The market currently expects further rate cuts of 1.5 percentage points by the end of next year. If this projection holds true and current spreads remain stable, this could lead to favorable outcomes for both new equity loans and consumers with existing HELOCs, reducing the monthly payment on a $50,000 withdrawal to less than $300,” he said. Walden explained.

While this payment remains above the 20-year average, it reflects a decrease of more than 25% from recent peaks.

“As borrowers have become increasingly sensitive to even minor rate drops, this could encourage more homeowners to use HELOCs, especially as many sit on record levels of equity while benefiting from low mortgage rates of first degree,” Walden noted.

Housing inventory growth has slowed recently due to declining home prices. The arrival of more properties on the market, combined with higher prime mortgage rates than last summer, has shifted the balance of power in pricing away from sellers.