Borrowers are tapping their homes for cash again as the real estate market has caught fire. But are the good times coming to an end?
Home equity lines of credit originations hit a nine-year high last year amid soaring real estate prices. Today, however, the boom faces threats from rising interest rates and tax law changes that could make consumers think twice about borrowing against their homes' values.
Nationally, lenders issued 400,000 home equity loans in the third quarter of 2017, but that's less than half of peak lending—925,000 home equity loans during the second quarter of 2006. “Even with that nine-year high, it's less than half of the pre-recession peak,” says Daren Blomquist, senior vice president of communications for Attom Data Solutions, which tracks mortgage lending and delinquency statistics. “It's still more of a gradual increase. There are some characteristics of a boom, but it's a much more rational boom, as opposed to irrational exuberance.”
Attom's data for Columbus reflects the national trend. After hitting a peak of 6,738 originations in the second quarter of 2006 just before fiscal crisis, home equity bottomed out in Columbus with 2,097 originations in the first quarter of 2010. The numbers then climbed back up, hitting a post-recession high of 4,995 new home equity lines in the third quarter of 2016.
Higher-priced real estate is driving the revival. The median price of a home in Columbus went up 7.8 percent in early 2018 compared with early 2017, and median home prices here have bounced back 65 percent since the real estate market fell to its lowest point in early 2011.
“Home values have risen over the past few years and homeowners are deciding to stay in their homes longer and use the equity they now have available instead of moving, since there is limited inventory in the market today,” explains Rob Bachman, director of lending for BMI Federal Credit Union.
Ohio credit unions showed an 8 percent surge in home equity lending last year, while only a 0.9 percent increase in first mortgages—either for purchase or refinancing. “Most people who are accessing equity in their houses are just not moving,” says Brian Hitchcock, a senior loan officer at First Financial Bank. “They say, ‘I have an equity line to improve my house to make it the house I want to live in. I can't find a better home elsewhere, because nothing else is for sale.' So if I live in Colonial Hills in Worthington, say, I love my 1,200-square-foot house, the neighbors and walking the neighborhood. I can borrow to add on to it and make it a 2,000-square-foot house.”
Still, the home equity universe is staggeringly big. America has doubled its home equity values, from about
$6 trillion in 2010, to about $14.4 trillion by the end of last year, according to the Federal Reserve Bank of St. Louis. Americans are paying down mortgages—both their first mortgages and their home equity lines—and that's improving their personal balance sheets.
As Americans clear up post-recession debt, the balances on home equity loans are going down, too, according to an April report by Equifax, the credit rating agency. Nationwide, 2017 home equity line balances are $418 billion, a 38 percent decline since 2009 and a 6.2 percent decline from 2016, Equifax reports.
Homeowners, it turns out, are fairly conservative borrowers and spenders when it comes to their equity loans, and most want them paid down or paid off.
But homeowners have to think about higher interest rates and stricter rules for deducting interest on second mortgages, and most experts agree that a combination of factors has already taken the bloom off home equity lines.
The Tax Cuts and Job Act of 2017 has restricted the deductibility of interest for home equity loan interest payments to apply only to borrowing for home improvements. And interest rates have risen at least 1.5 percent for most home equity lines, though still within a wide range of variable and fixed rate products.
“Some of the tax benefits of home equity loans are removed with the new tax law, but interest is still deductible as long as the loan is used for home improvement,” Blomquist says.
“I think the reaction from most people is that we won't get a tax deduction,” says Eric Bishoff, president and CEO of the Bishoff Financial Group. “It will make [home equity borrowing] less attractive. Don't get me wrong. Any time you can borrow from your home and get a good rate, it's still a valuable tool. But with HELOC you usually get a variable rate, and with the interest rate environment we're in, that's not a great idea.”
“The tax law has changed the dynamic,” agrees Greg McBride, chief financial analyst at Bankrate.com, the personal finance website. “Two years ago, the rate might have been 4.5 percent, but your net cost might be 3 percent after taxes. Now switch that with interest rates going up: the 4.5 percent rate is now 6 percent, and you can't deduct all the interest, so your net cost has doubled.”
The Stormy Daniels saga has highlighted a creative use of home equity—former Donald Trump lawyer Michael Cohen's alleged use of a line to fund a nondisclosure agreement with the porn star. No lenders wanted to comment on that subject, but they did say homeowners generally are using their home equity for basics like room additions, new windows and other home improvements.
“I've never had anyone come to me and say they need to finance their pot farm or buy a share of the space station,” Hitchcock says. “Most people love to share their plans. A lot of times, it's a safety blanket, a security blanket. But the most common thing is to fix up the house.”
McBride warns borrowers to avoid using home equity for frills. “A few years of buying toys and taking vacations to Hawaii with home equity—that's a recipe for trouble sooner or later. And if you're going to consolidate credit card debt from last year's vacation and the toys you bought last year, all you're doing is moving around the debt.”
Have some homeowners crossed that line anyway? Some lenders are tempting consumers with home equity lines up to 100 percent of a home's value, so that a $300,000 home could have a $200,000 first mortgage and a $100,000 home equity line.
But the healthy economy, higher home values and the higher standards of today's loans—documenting income, assets and employment of borrowers—seem likely to keep home equity lending on track, most experts agree.
“There's a different set of ground rules than before the housing crisis,” McBride says. “Twelve years ago, they'd lend against every last nickel in the home or more. Now most HELOC borrowing requires the homeowner to retain a 20 percent equity stake typically.”
Mike Mahoney is a freelance writer.