A version of this article first appeared in the CNBC Property Play newsletter with Diana Orrick. Property Play covers new and evolving opportunities for real estate investors, from individuals to venture capitalists, private equity funds, family offices, institutional investors and large publicly traded companies. Sign up to receive future editions directly to your inbox.
Thanks to the rapid rise in home prices over the past few years, American homeowners have more home equity than ever before. But they don’t spend much of that money.
There was a total of $11.5 trillion in so-called “available” housing equity in the second quarter of this year, according to data technology company Kotality. This is the amount a borrower can borrow while still leaving enough in the house to satisfy the lender. Mortgage borrowers now have $17.9 trillion in total equity, or an average of $310,000 per homeowner, an increase of $6,000 from the previous three months.
Homeowners took out nearly 20% more second mortgages or home equity lines of credit (HELOCs) compared to the first quarter, but that still represented less than 0.1% of the total capital that could have been available.
“The borrowers with the most home equity are often the least likely to use it,” said Tom Malone, chief economist at Kotality. “They tend to have low mortgage rates, good cash flow and little reason to move.”
That means all that cash is sitting on the sidelines as home prices in most parts of the country continue to rise modestly and continue to get worse. Consumers are also increasingly nervous about economic conditions and rising interest rates. Taking out a second loan probably means doing it at a much higher interest rate than your first mortgage, but most people don’t do this unless they absolutely have to.
Mortgage rates fell to record lows during the first two years of the COVID-19 pandemic. That means anyone who bought a home during or before that period would have an interest rate that’s at least one-third of the current rate. Lower monthly payments typically greatly enhance your cash flow, allowing you to finance things like renovations and college tuition without dipping into your home equity.
All properties are local and there is wide variation as capital is heaviest in the West and North East. The average homeowner equity level in Hawaii and California exceeded $600,000, and in Massachusetts it exceeded $400,000. By contrast, capital levels in Louisiana, Oklahoma, and Iowa are just over $100,000. The difference is not only obvious, but actually widening, as home price appreciation is stronger in markets where stock prices are already high.
Homeowners in most states have gained equity, but in some states they are losing equity as home values decline. These include states such as Texas, Minnesota, Colorado, and Maryland, as well as the District of Columbia. The proportion of borrowers with mortgages that exceed the value of their home, so-called underwater mortgages, remains quite low at just 2.1%.
