NEW YORK–More Americans are tapping their (rising) home equity.
According to Equifax, home-equity line originations rose 8% to nearly $46 billion in the second quarter, their highest level since 2008. Freddie Mac additionally reported that borrowing via cash-out mortgage refinances hit $15 billion, up 6% from a year earlier, according to recent data from Freddie Mac.
Driving the increased use of home equity loans is, not surprisingly, the increased equity Americans have in their homes as home prices continue to rise. The Wall Street Journal noted for instance, that the median sale price of an existing home rose to $263,800 in June, the highest on record, up 40% from $187,900 at the start of the year.
People tapping home equity obviously raises fears of the same scenario taking place that occurred in the lead-up to the housing crash of a decade ago. But financial institutions interviewed by the Wall Street Journal downplayed those concerns, saying they are being more cautious in making loans and there are few signs of a bubble. In addition, FI execs said many borrowers are using funds to tackle renovations or consolidate debt—uses that are considered investments rather than luxuries.
“We continue to watch what’s going on and the way it’s being done, but it’s much different from before the crisis,” Tom Wind, head of U.S. Bancorp’s home-mortgage division, told the Wall Street Journal. Wind said U.S. Bancorp expects this type of borrowing to keep rebounding because the equity in people’s homes is “meaningful and people want things like renovations.”
The Wall Street Journal further noted that “for banks, increased originations aren’t yet strong enough to stop continued declines in the overall level of outstanding home-equity-line debt. This is a hangover from the surge of such borrowing during the housing bubble. Lenders originated a combined $720 billion of home-equity-line credit in 2006 and 2007, according to Equifax data. Borrowers typically only pay interest on these loans for the first 10 years. In subsequent years, both principal and interest is due. Given that, borrowers often look to repay or refinance home-equity lines at or around the 10-year mark. Because of this, and the huge amount of such debt that was originated around a decade ago, new originations haven’t been enough to offset repayments.”
The result, the Journal reported, is that U.S. banks’ holdings of about $387 billion in revolving home-equity loans as of early August are down more than 35% from a peak of around $610 billion in early 2009, according to Federal Reserve data.