According to the Federal Reserve, home equity has roughly doubled to $12.1 trillion since house prices hit bottom in 2011. As a result, a key gauge of housing wealth—homeowners’ equity as a share of real-estate values—is nearing the point seen 10 years ago, before the downturn. This once would have given a significant boost to the economy, providing owners with more money and making them feel more flush and likely to spend. But today, this new wealth has little effect on homeowners’ behavior. The traditional ways Americans tap their home equity – home-equity loans, lines of credit and cash-out refinances – are still depressed, although higher than last year.
In the first half of the year, owners borrowed $43.5 billion against their homes with home-equity loans and lines of credit, according to Inside Mortgage Finance – 45% higher than in the first half of 2014, but hardly a quarter of the amount seen when equity was last as high in 2007.
Cash-out refinances, which let homeowners take out a new mortgage and tap some of the home’s value at the same time, were up 48% in the three months ended in August from the year-earlier period, according to Black Knight Financial Services. However, they remain below the level seen in the summer of 2013. The average cash-out refinance in the three months ended in August left the borrower with mortgage debt of about 68% of the home’s value—not a risky level by any means.
Home equity’s effect on consumer spending is at its lowest level since the early 1990s, according to Moody’s Analytics. The research firm estimates that every $1 rise in home equity in the fourth quarter of 2014 would translate to about two cents of extra consumer spending over the next one to one and a half years. That was a third of the impact home equity had before the downturn.
Why aren’t homeowners feeling that they have money to spend again? Firstly, since rising home prices over the past few years have made up for ground lost during the recession, many owners might not even realize they have equity to tap. The percentage of homeowners who thought they were underwater fell by merely one percentage point to 27%, according to Fannie Mae. Home equity is seen as more fleeting than it used to be. Plus, mortgage lenders aren’t giving owners access to as much equity as they used to. Finally, other kinds of loans are cheaper, removing one incentive to tap home equity.
“Consumers are definitely more conservative financially than they were 10 years ago. They’ve seen that house prices can be volatile,” Fannie Mae chief economist Doug Duncan said.
Home equity as a share of real-estate values at the end of the second quarter was 56%, according to the Federal Reserve, not quite back to the level of 60% seen in the boom. That means Americans’ mortgage debt is still high relative to home values, which could be another factor affecting the decision of whether or not to cash out equity.
Could this change anytime soon? Some economists think it’s possible – in many metro areas, home prices have overtaken or are about to overtake their boom-era peak. This is significant because it indicates new home equity is being created rather than merely making up for lost ground. It also means fewer homeowners are underwater, freeing them up for a home sale and potential purchase while also making home improvements and renovations seem less like throwing away good money.
“We’re at an inflection point. Since the crash, it’s all been about repairing homeowners’ equity but now that house prices are returning to prerecession levels, we will see homeowners’ equity driving consumer spending, home improvements and economic activity,” said Moody’s Analytics chief economist Mark Zandi.