For a couple of years, it seemed like American homeowners forgot their post-GFC caution about “withdrawing equity” from their homes. (This equity withdrawal basically involves borrowing against a portion of a home’s value that someone has already paid down.)
But new consumer-credit data from the New York Fed this week shows that US central bankers have stopped that trend by jacking up interest rates. Plus, as Goldman Sachs highlights in a note this week, Americans weren’t borrowing that aggressively against their homes during the Covid-19 pandemic anyway.
And why would they?
With historically low interest rates and historically high savings early in the pandemic, a majority of US homeowners — albeit a small majority — refinanced to lock in lower rates, the New York Fed found. They constituted around 64 per cent of the refi transactions between 2Q 2020 and 4Q 2021, according to the Liberty Street Economics blog.
The remaining 36 per cent cashed out a significant proportion of their homes’ values. That led to a jump in the total dollar amount of home-equity borrowing, as the New York Fed’s bloggers wrote. But that borrowing remained a small proportion of Americans’ disposable personal income, or dpi, as shown by the red line below:
And then, as we all know too well, US interest rates soared from zero to more than 5 per cent in the span of about 14 months.
Mortgage refinancings froze as broader borrowing costs went up, and US homeowners made net contributions to their homes’ equity rather than withdrawals.
This handy chart from Goldman’s note makes clear the post-GFC trend of cautious home financing by Americans, along with the short reversal in that trend after the pandemic:
There’s pressure coming from the banking side as well, according to Fed surveys.
Banks are imposing tighter standards on the revolving lines of credit that they extend against homes (HELOCs), which are popular for financing renovations and other major home projects. Goldman plots banks’ historical survey responses about HELOC loan demand and standards in the chart below:
And finally — what do you know! — the strains on midsized, regional and small lenders could have an impact on HELOCs as well. Smaller banks have kept a growing share of revolving home-equity loans on their balance sheet. While the totals don’t surpass the larger banks, they have $100bn to large banks’ $155bn:
So what does all of this mean?
First, homeowners’ use of HELOCs will be fairly limited (and possibly unpopular) as long as US interest rates stay high. That could slow demand for construction materials, appliances and man-hours used in renovations.
There are also some silver linings to this, in Goldman’s view. From the note:
Entering 2024, however, we think mortgage equity withdrawal will pick up. Recent data points such as new home sales suggest an inflection point in the housing recession as the housing market remains tight . . . Crucially, homeowner sentiment has improved; the April data point of the Fannie Mae National Housing Survey indicates that respondents now expect positive home price appreciation for the next 12 months, a stark change from prior months . . . While we expect interest rates will remain high, stronger housing market sentiment by year-end could give homeowners confidence to tap into the $9.3 trillion of home equity at their disposal.
Further reading:— Can equity release help hard-pressed pensioners? (FT)
HELOCked and loaded
