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Higher home prices may be frustrating potential homebuyers, but they are funneling a strong new flow of "tappable" cash into homeowners' pockets.
How much: $260 billion in additional home equity just in the first quarter of this year. With that increase, 38 million borrowers now have at least 20 percent equity in their homes — averaging about $116,000 per borrower, according to Black Knight Financial Services. That is a far cry from just 24 million who had that much equity when home prices finally hit bottom at the start of 2012.
"As we approach the 10-year anniversary of the pre-crisis peak in U.S. housing prices, we're just under 3 percent off that June 2006 peak nationally, and 23 states have already passed their 2006 peaks," said Ben Graboske, executive vice president at Black Knight Data & Analytics. "The result is that equity levels are rising nationwide for the most part."
With mortgage rates falling to near record lows, refinancing is surging again. Applications to refinance jumped 21 percent a week ago, after the full effect of the Brexit vote hit the U.S. bond market, driving yields to new lows. Mortgage rates loosely follow the yield on the 10-year Treasury. Even before the big rate drop, refinances represented 40 percent of all closed loans in April, according to Ellie Mae.
Borrowers today, however, are still cautious. While 42 percent of refinances in the first quarter of this year were "cash-out," homeowners only tapped a collective $20 billion. That may sound like a lot, but it was just one half of 1 percent of the cash available to borrowers, according to Black Knight.
That may change with the continuing price growth and new lower rates. Freddie Mac is now forecasting the refinance share of mortgage originations is to rise to 49 percent for 2016, 8 percentage points above last month's forecast. This translates into $100 billion more in originations; even if borrowers continue to be cautious, that's billions more in their collective pockets.
This will certainly continue to fuel an already strong home remodeling market, and benefit the stocks of retailers like Home Depot, Lowe's,Sherwin-Williams and Masco. Homeowners are already are investing bigger budgets into kitchen and bathroom renovations, the most popular rooms to remodel. Spending on both increased last year by 12 percent from the previous year, according to Houzz, a remodeling and design website.
During the last housing boom, homeowners used their properties like cash machines, pulling out more equity than the house or the market could support. Arguably, no one wants to see that again, and so far, it is not happening.
"During the mid-2000s, as house prices went up, borrowing went up almost dollar for dollar. In the last few years, when house prices have again been increasing more rapidly than the long-term average, mortgage borrowing has not increased at all. In fact it has decreased," said Sean Becketti, Freddie Mac's chief economist.
Much of that may be due to more careful lending. The equity may be there, but lenders are far more strict about letting borrowers pull it out, especially if their incomes don't support the higher debt.
"We are hoping that people continue to be prudent about cashing out, but part of it is, lenders are more cautious. One of our frustrations at Freddie Mac is we think we've set a very prudent credit box, but we find that lenders won't go all the way out to the edge of our credit box. They are more restrictive than we would allow them to be. They just are super cautious," added Becketti.
Mortgage refinances will likely rise on lower rates, but the same volatile global economic conditions pushing rates down are making borrowers even more cautious. The cash-out share is not expected to change, as lenders keep standards high and homeowners keep their personal leverage in check.