With home values rising more rapidly than expected, homeowners are tapping the equity in their homes, which is driving higher profits for retailers like Home Depot and Lowe’s. However, a CNBC report indicates that it may also come with some red flags. Since the housing crisis, homeowners have been more restrained when it comes to home equity. With more Americans in the black, home equity lines of credit (HELOCs) are becoming more popular, allowing homeowners to pull cash out of their homes when they need it. HELOC volume is now up 21 percent in the past two years, to the highest level since 2008, according to Moody’s. Peter McNally, senior analyst at Moody’s, said the rate of HELOCs is trending up.
“The more second liens that people take out, it adds a risk that comes from the rising home prices. The fact that people are leveraging their homes more than before makes things more risky.”
Another trend is smaller down payments. Prior to the last housing boom, average down payments were at about 7 percent, falling to 3 percent during the boom as lenders offered a wide range of “creative” loan products that required little or no money down. At the start of 2017, the industry has seen increasing mortgage interest rates, which is putting a damper on tapping into home equity. Daren Blomquist, vice president at ATTOM, said while down payments are trending lower, the industry is seeing the first significantly higher mortgage rates in more than three years.
“Rising interest rates did seem to have a chilling effect on homebuyers using financing, as evidenced not only by the drop in purchase loan originations but also a corresponding rise in the share of cash buyers, drop in FHA buyer share and a rise in the average down-payment percentage in the fourth quarter compared to the previous quarter.”
While homeowners have more leverage, they are working in a landscape that is much different than 2006 with stricter mortgage underwriting, particularly for HELOCs. There also is some concern that home prices may be overheating. Even though there is minimal risk of home prices falling nationally, gains will decrease and hot markets could cool.