Fiona Nanna, ForeMedia News

4 minutes read. Updated 6:16PM GMT Tues, 5th November, 2024

As the economic landscape continues to evolve, homeowners in the United States are increasingly starting to withdraw cash from their properties, signaling a notable shift in consumer behavior. U.S. homeowners currently hold a staggering amount of equity, with estimates suggesting over $17 trillion in total equity available. However, a significant portion of this wealth has remained untapped as higher interest rates have made homeowners cautious about leveraging their assets. Recent trends indicate that this is finally beginning to change.

According to recent data from ICE Mortgage Technology, mortgage holders withdrew $48 billion in home equity during the third quarter of this year. This figure marks the largest withdrawal in the two years since the Federal Reserve began raising its benchmark interest rate. While mortgage rates do not always directly follow the Fed’s actions, home equity lines of credit (HELOCs) are often influenced by these shifts. Following a cut of 0.5 percentage points by the Fed in mid-September, many homeowners appear to be reassessing their options.

Cautious Optimism Among Homeowners

Despite the uptick in withdrawals, homeowners are still exercising caution. The data reveals that while there is a collective equity of approximately $11 trillion that is tappable—meaning homeowners can borrow against it while maintaining a minimum of 20% equity—only 0.42% of this tappable equity was withdrawn in the third quarter. This is significantly less than half the average rate observed in the decade leading up to the Federal Reserve’s rate hikes.

Andy Walden, Vice President of Research and Analysis at ICE, emphasized the impact of this cautious approach. “Over the past 10 quarters, homeowners have extracted $476 billion in equity, which is exactly half of what we would expect to see under more normal circumstances. This means nearly $500 billion remains untapped in the economy,” he stated.

Homeowners typically use this equity for vital expenditures such as home repairs, renovations, or significant costs like college tuition. However, the cost of borrowing has risen sharply. For example, the monthly payment required to take out $50,000 in a HELOC more than doubled from as low as $167 in March 2022 to approximately $413 by January of this year, although recent rate cuts have provided some relief.

Future Implications and Market Dynamics

Looking ahead, market analysts predict another 1.5 percentage points in rate cuts could occur by the end of next year. If these predictions hold, existing HELOC borrowers may see their payments for a $50,000 withdrawal drop back below $300 per month. While this cost remains higher than the 20-year average, it represents a significant reduction of over 25% from previous peaks.

Walden added, “Given borrowers’ recent sensitivity to even slight rate drops, this could entice additional HELOC utilization, especially with mortgage holders sitting on record stockpiles of equity.”

However, it is crucial to note that home equity growth has started to moderate as home prices begin to stabilize. With an increase in market supply and primary mortgage rates climbing higher than earlier this summer, sellers may find themselves with diminished pricing power.

In summary, while U.S. homeowners are slowly beginning to tap into their equity, they remain cautious in light of past interest rate hikes and the current economic environment. The potential for upcoming rate cuts could further incentivize homeowners to make use of their equity for essential projects and expenses, indicating a pivotal moment in the housing market.

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