Americans have more equity in their homes than ever before.
U.S. total net worth increased nearly 20% in the first quarter to $27.8 trillion, a record high, according to the Federal Reserve.
This increase is another consequence of the red-hot housing market. Double-digit price increases have forced some would-be homeowners out of the market. At the same time, the rising cost of housing contributes to the growth of the finances of Americans who already own them.
However, rising rates have made it more expensive for homeowners to use this capital, the difference between the property’s market value and the mortgage balance. The Federal Reserve raised its benchmark rate by 0.75 percentage points on Wednesday, the biggest increase since 1994, in a bid to bring down persistent inflation.
According to the mortgage company Black Knight, in 2021, about 60% of the capital was withdrawn through cash-in refinancing..
Homeowners are likely to turn to home equity lines of credit, said Andy Walden, vice president of corporate research strategy at Black Knight. The cost of borrowing on such products is more closely linked to the Fed’s base rate, which has changed less than mortgage rates this year. The Fed is expected to raise rates again at its meeting this week.
Under the equity line, borrowers pay interest on the amount of the loan they use; in a cash refinance, the money taken from the home is added to the outstanding mortgage, meaning the new rate is applied to the higher balance.
Available capital increased by a record $1.2 trillion in the first quarter of 2022 to over $11 trillion, according to Black Knight. According to Black Knight, about 75% of them are owned by borrowers with mortgage rates below 4%. 30-year fixed-rate mortgages averaged 5.23% in early June, according to mortgage giant Freddie Mac..
Black Knight defines available equity as the amount that homeowners can borrow while holding at least 20% of a home’s equity. According to Black Knight, the average asset available to Americans with mortgages increased to a record $207,000 in the first three months of the year.
“There is more capital available than ever, but it just got more expensive to borrow against your own home,” Mr. Walden said.
Net worth usually increases with the value of the home over time. In the US, total wealth shrank by about 42% between 2005 and 2012, when millions of Americans owed more on mortgages than their homes were worth. Total equity has been steadily rising since 2012, and the 20% jump in the first quarter is the biggest since 2013.
According to CoreLogic Inc., this year’s capital gains are expected to drive a record amount of home improvement spending.
This spring, Steve English decided to take out a home equity loan of about $80,000 to replace the roof and decking on his home in Eatonville, Washington. Mr. English thought about redecorating the house a few years ago when the flooring was ready. costs about 40% less, he said, but he didn’t have enough capital to borrow.
His home is worth more than $700,000, according to a valuation this year by his home equity lender, Discover Home Loans. This is more than double the $325,000 he paid in 2016.
“The equity in my home has skyrocketed over the last two years,” Mr. English said. “It definitely influenced my decision to use it.”
Raising equity presents another business opportunity in the mortgage industry, which is suffering from shrinking volumes due to blockbuster mortgage markets in 2020 and 2021.
Mortgage lenders are working this year to weather a sharp decline in the number of homeowners refinancing their loans, with demand dwindling as interest rates rise.
Email Orla McCaffrey at [email protected]
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