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Homeowner Equity Levels At All Time Highs
Homeowners tappable equity levels are at $5.4 trillion; the highest level on record.
Estimated $5.4 trillion of tappable equity is now available to homeowners; 10% more than at the pre-recession 2005 peak.
Homeowners today are far more conservative this time around
According to a new report from Black Knight Data & Analytics, today's homeowners are able to tap into the highest home equity levels on record
$735 Billion: That's the amount of increased equity value experienced by homeowners over the course of 2017; nobody is complaining, as this is the largest annual increase by dollar value on record. This brought the collective amount of so-called "tappable equity" to $5.4 trillion, 10% more than at the pre-recession peak in 2005.
Homeowners and lender's today are far more conservative than during the years leading up to the recession. Even with record amounts of tappable equity, last year homeowners only took out $262 billion via cash-out refinances or home equity lines of credit (HELOC). While that is another post-recession high in terms of dollars, it is less than 1.25% of all available equity, a four-year low.
More than half of borrowers withdrew equity last year using cash-out refinances, thanks to record-low interest rates. That is expected to change in 2018 and 2019, given a higher interest rate environment. Almost three-quarters of borrowers with tappable equity have interest rates lower than current interest rates, so the will likely utilize second loans, HELOCs, instead.
While rising rates generally tend to dampen equity utilization, the market appears poised for a strong shift toward HELOCs. HELOC's allow borrowers to take advantage of growing equity by borrowing against it with historically low first-lien interest rates. More than 50% of that tappable equity, approx $2.8 Trillion, belongs to borrowers with credit scores of 760 or higher, all with first-lien interest rates below current prevailing rates. This creates a very large pocket of low-risk HELOC candidates.
Homeowner equity varies depending on location, and currently, it is highly concentrated in the high-priced states of California and New York. In fact, almost 40% of the nation's total tappable equity is in California. Seattle and Las Vegas, which have seen huge home price jumps, have seen big equity increases as well.
More Remodeling & Improvement
While borrowers tend to use home equity for a variety of purposes, such as paying down debt or education expenses, the primary use is home improvement. This is truer than ever, as we face a critical shortage of homes for sale, and has more owners staying in their houses longer and choosing to renovate rather than upgrade to another home and lose their low interest rates. The average homeowner now stays in their home for 10 years, an all-time high, according to the National Association of Realtors.
Homebuying optimism overall is at its lowest level in two years, according to the NAR, especially among first-time buyers who can afford less. With more homes being remodeled, while average home prices are increasing, fewer homes are available for first time buyers, a crucial part of the real estate market. Current homeowners are feeling more optimistic about selling, although available listings for them to choose from are down double-digit percentage points from this time last year.
There is no question that most homeowners have amassed considerable equity gains since "the bottom". Home prices have increased 48% cumulatively since 2011, and are up 5.9% through the first two months of this year. Supply conditions would improve measurably, and ultimately lead to more sales, if a growing number of homeowners finally decide that this spring is the time to list their home for sale.
So far this has yet to happen. Instead, it looks like homeowners have decided to do exactly the opposite, and opting to improve what they have. This is leading to fewer listings and more remodels. Homeowners in the US will spend approx $335 billion on remodel and home repair expenses this year, a 7.5% increase over last year. Despite continuing challenges of dwindling inventory for remodel-eligible homes and contractor labor availability, 2018 could post the strongest gains for home remodeling in more than a decade. Annual growth rates have not exceeded 6.8% since early 2007.
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