Record Levels of Tappable Home Equity — Evening Brief – 11.05.24
Despite current volatility in the interest rate market, recent and projected interest rate cuts by the Federal Reserve may positively influence equity-based lending, according to Intercontinental Exchange (ICE).
The fintech and data services provider published its latest Mortgage Monitor, analyzing homeowner equity data and reporting on quarterly and annual growth in the housing wealth of mortgage holders.
Despite elevated borrowing costs against a homeowner’s equity compared to before the Federal Reserve’s latest tightening cycle, this dynamic is expected to shift in the coming year, according to Andy Walden, ICE VP of research and analysis.
ICE reported that as of the end of the third quarter, U.S. mortgage holders held $17.2 trillion in equity (up 5% from last year) of which $11.2 trillion is ‘tappable,’ meaning it can be borrowed against while the homeowner retains a 20% equity ownership in their house. The average homeowner with a mortgage now has $319,000 of equity in their home, of which $207,000 is tappable, the report showed.
Although withdrawals reached a two-year high of $48 billion in the third quarter, both collectively and individually among second lien products ($27 billion) and cash-out refis ($21 billion), the total represented only 0.42% of available tappable equity, according to ICE, far below the 0.92% average extraction rate in the decade preceding the most recent round of Fed rate hikes.
“Second lien withdrawal rates are currently running more than a quarter below ‘normal’ and cash-out refi withdrawals are still down almost 70%,” Walden said. “Over the past 10 quarters homeowners have extracted $476 billion in equity, exactly half the extraction we’d expect to see under more normal circumstances. That equates to nearly a half a trillion untapped dollars that hasn’t flowed back through the broader economy.”
Meanwhile, introductory rates on HELOCs have surpassed 9.5%, more than doubling the $167 March 2022 monthly interest-only payment needed for a $50,000 withdrawal to a high of $413 in January 2024, the report noted. However, the Federal Reserve’s rate-cutting campaign, more directly tied to HELOC than 30-year mortgage rates, has already made equity withdrawals “modestly more affordable and attractive,” noted Walden.
If the market’s prediction of another 150 basis points of interest rate cuts through the end of next year materializes and current spreads hold, “it’ll have positive implications for both new equity lending as well as for consumers with existing HELOCs, with the payment on a $50,000 withdrawal falling back down below $300 per month,” Walden said, which is still notably higher than the historical average, but more than 25% below recent highs.
According to ICE’s data and industry estimates, mortgage rates are not expected to see the full predicted rate decrease filter through to 30-year offerings, thus tightening the spread between 30-year mortgage and HELOC rates and “tip the needle toward equity utilization via HELOCs for a subset of mortgage holders,” the report concluded.