American homeowners are finally digging out of the hole created by the housing crisis. But their housing wealth is playing a much smaller role in the overall economy than it did before the downturn.
Home equity has roughly doubled to $12.1 trillion since house prices hit bottom in 2011, according to the Federal Reserve. As a result, a key gauge of housing wealth—homeowners’ equity as a share of real-estate values—is nearing the point seen a decade ago, before the downturn.
Such a levels once would have offered a double-barreled boost to the economy by providing owners with more money to tap and making them feel more flush and likely to spend. But today, that newfound wealth has had little effect on behavior. While the traditional ways Americans tap their home equity—home-equity loans, lines of credit and cash-out refinances—are higher than last year, they are still depressed.
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 trade publication Inside Mortgage Finance. That was 45% higher than in the first half of 2014, but scarcely a quarter of the amount seen when equity was last as high in 2007.
Meanwhile, 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. But they remain below the level of summer 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 stretch.
Home equity’s effect on consumer spending is at its lowest ebb since the early 1990s, according to the Moody’s Analytics. The research firm estimates 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 1 to 1½ years. That was a third of the impact home equity had before the bust, Moody’s said.
The impact is more muted now despite the fact that home equity per homeowner has roughly doubled. At the end of the second quarter, the figure was about $156,700, up from $81,100 in the second quarter of 2011, according to Moody’s Analytics chief economist Mark Zandi. Though the homeownership rate has fallen, the total number of households has increased, meaning the number of households that own hasn’t changed much since the housing bubble burst in 2006, Mr. Zandi said.
Why aren’t homeowners feeling flush again? For one, since rising home prices over the past few years largely 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 were underwater, or owing more on their mortgage than the home’s value, dropped to 8.7% by mid-2015 from 21% at the end of 2011, according to CoreLogic. Yet the percentage of homeowners who thought they were underwater fell by merely one percentage point to 27%, according to housing-finance company Fannie Mae.
The bust looms large and home equity is seen as more fleeting than it used to be, said Fannie Mae chief economist Doug Duncan.
“Consumers are definitely more conservative financially than they were 10 years ago. They’ve seen that house prices can be volatile,” Mr. Duncan said.
Mortgage lenders also aren’t giving owners access to as much equity as they used to. While it was common during the boom to see loans that took out 100% or even more of a home’s value, now few will let an owner take out more than 80%.
Finally, other kinds of loans are cheaper, removing one incentive to tap home equity.
Six years ago, for example, the average five-year new-car loan had an interest rate of 6.83%, versus 5.56% for a $30,000 home-equity credit line. But in the week ended Nov. 11, the average interest rate for a five-year new-car loan was 4.3%, according to Bankrate.com, versus 4.74% for the HELOC.
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 elevated relative to home values, which could be another factor affecting the decision of whether or not to cash out equity.
Could home equity start to flex its muscle sometime soon?
Some economists think it might. One reason: In many metro areas, home prices have overtaken or are about to overtake their boom-era peak.
At the end of the third quarter, about 38% of metro areas had prices above their pre-2009 peak, up from 30% last year, according to Moody’s Analytics and CoreLogic. Another 13% of metros are within 5% of their pre-bust peak.
That’s important, because it means 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 move-up purchase while also making home improvements and renovations seem less like throwing good money after bad.
“We’re at an inflection point,” Mr. Zandi said. “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.”