The combination of rising home prices and falling mortgage rates has U.S. homeowners sitting on a veritable fortune in home equity.
The collective amount of money borrowers could pull out of their homes, while still retaining 20% equity, hit a record $6.3 trillion in the second quarter of this year, according to a new reading from Black Knight, a mortgage data, technology and analytics company.
So-called tappable equity grew by more than $335 billion during the quarter. The total is 26% more than the mid-2006 peak of $5 trillion. Roughly 45 million mortgage holders have excess equity, and half of them have mortgage rates higher than 4.25%, making a refinance not only possible but attractive. The average rate on the 30-year fixed is now around 3.6%. The majority of these borrowers also have top credit scores.
Falling mortgage rates over the past several months have caused a surge in overall refinance activity, but despite the record housing wealth, homeowners have been highly conservative about taking cash out. In 2006, 89% of refinances were cash-out, according to Freddie Mac. In 2012, when home prices crashed, that share dropped to 12%. But even now, with prices back above their previous peak and mortgage rates much lower, cash-out refinances are just 61% of the total pool of refinances.
"I think you're seeing a little bit of reluctance both on the side of lenders and on the side of borrowers," said Andy Walden, director of market research at Black Knight. "If you look at lending, guidelines are a little bit tighter than they were back in 2006, but even given those lending restrictions, I think you're seeing more conservative behavior on behalf of homeowners as well, as folks have the remembrance of the financial crisis in the rearview mirror."
During the last housing boom, homeowners were using their homes like ATMs, and the lenient mortgage market of the time allowed them to take all the equity, and even more, than they had. When home prices plummeted, millions of borrowers fell underwater on their mortgages, owing more than their homes were worth. That caused an epic foreclosure crisis.
Homeowners may now be concerned that the heat in home prices is not only cooling, but that prices in some markets may actually fall. Prices were still gaining by 3.1% annually in June, according to the latest S&P CoreLogic Case-Shiller national home price index, but that is half the gain that homeowners were seeing a year ago. In some major markets, like New York City, Los Angeles, Chicago and San Francisco, prices are barely in the positive, and in Seattle prices were actually 1% lower compared with a year ago.
"When we saw interest rates start to rise last year and affordability tightened up, and some of those more expensive equity rich markets in California started to see equity fall, you saw national numbers fall in that same direction as well," Walden added.
Walden said he does expect cash-out refinances to grow over the next few quarters, especially as more people are staying put in their homes longer and choosing to renovate rather than upsize or downsize. Overall, however, cash-out refinances may be lower simply because the economy is relatively strong.
"Savings have increased significantly since before the Great Recession, so the household balance sheet is just in a better position," said Bob Broeksmit, president and CEO of the Mortgage Bankers Association. "Perhaps the need to tap that equity is a little bit lower and there is a little bit more discipline among consumers."