5 Reasons Home Equity Loans Are Coming Back

This piece originally appeared in the April 2022 edition of MReport magazine, online now.

After more than two years of a pandemic-inspired housing boom, the housing market is changing rapidly amid rising interest rates, rising home values ​​and less threat from COVID-19 .

In March 2020, the housing market took an unexpected turn as the realities of the COVID-19 pandemic set in. States and cities began issuing stay-at-home orders, and interest rates plummeted.

Throughout the pandemic, it was a tale of two worlds as many homeowners, now out of work, applied for mortgage forbearance in order to avoid foreclosure. Others, however, had the option of working from home and watched plummeting mortgage interest rates. This has created a surge in mortgage activity with existing homeowners looking to refinance or look to new homes and new homeowners looking for their ideal home.

According to the Mortgage Bankers Association (MBA) Mortgage Applications Report March 9, 2022, refinances rebounded slightly 9% week-over-week in response to a slight drop in rates; however, refinancing activity fell 50% year over year. Forecasts predict further interest rate hikes and a consequent decrease in refinancing activity, ending the refinancing boom.

As the housing market evolves this year, a new trend is likely to emerge: home equity loans. In fact, here are five reasons why home loan products that let you borrow against the equity in your home are likely to make a big comeback in 2022.

1. The spread of COVID-19 is slowing in the United States
Over the past two years, the housing market has become almost impossible to predict, as the COVID-19 pandemic has become one of the most influential and unpredictable economic variables.

New variants of COVID-19 and even the government’s response to rising COVID-19 cases and deaths have become a major risk factor.

For economists, the pandemic was anything but boring. It has become one of the biggest challenges in forecasting and remains one of the most important statistics for business leaders to track. COVID-19 cases, hospitalizations and death rates will impact the economy more than anything else.

While a new variant or risk could arise, for now the United States is trending toward fewer cases, fewer hospitalizations and fewer deaths, allowing many Americans to return to normal life. In late February, the Center for Disease Control (CDC) announced that most Americans could stop wearing a face mask.

As economic risks from COVID-19 continue to fade, the Federal Reserve will become less concerned with pandemic-related economic volatility and more concerned with controlling inflation rates. Accordingly, as the Fed has indicated, it intends to raise interest rates throughout the year.

2. Interest rates are starting to rise
Mortgage interest rates have already started to rise, rising from less than 3% at the end of 2020 to around 4% from late February to early March 2022. Rates will likely continue to rise throughout 2022 as the Federal Reserve is taking more aggressive action. , by raising short-term interest rates to combat rising inflation.

The Federal Open Market Committee (FOMC) also raised rates at its March meeting, citing inflation as well as uncertainties surrounding the Russian invasion of Ukraine.

The Fed could raise rates by about one percentage point in 2022 and another two to three percentage points in 2023. The outcome of these fed funds rate hikes will send mortgage rates skyrocketing, ending 2023 in a range. from 5.5% to 6%.

With interest rates on the rise, fewer homeowners will be able to lower their monthly payment with a mortgage refinance. When mortgage rates hit nearly 4%, according to Freddie Mac data, Black Knight sent out a report showing that only 3.8 million homeowners would benefit from refinancing. That’s down from the 11 million who could benefit at the start of 2022 and the 20 million in 2020.

However, as fewer homeowners are able to lower their monthly payments through refinancing or access equity in their home through cash refinancing, a new type of borrower will emerge: those who wish to withdraw money from their home without refinancing.

More and more homeowners will be looking for home equity loans to tap into their home’s unprecedented levels of cash without increasing the interest rate on their current mortgage.

3. Soaring home prices, giving homeowners better access to cash
Home prices have reached all-time highs, giving homeowners access to greater amounts of exploitable equity than ever before.

Home prices rose 19.1% annually in January, a brand new record high, according to the latest CoreLogic Home Price Index (HPI). Overall, homeowners earned $250 billion in workable equity in the third quarter of 2021, topping previous records, according to Black Knight’s Mortgage Monitor report.

“House price growth in the third quarter – although less than half the historic second quarter rate – added more than $250 billion to the already record levels of usable equity for Americans,” said Ben Graboske, chairman. from Black Knight, Data and Analytics, in the report. “The overall total of $9.4 trillion is up a stunning 32% from the same period last year and nearly 90% from the pre-Great Recession peak in 2006.”

Homeowners have access to more funds than ever before, averaging $178,000 per homeowner. These unprecedented levels will encourage homeowners to tap into the accumulated value of their homes through home equity loans for a variety of reasons, including home improvement projects, paying off debts, and a host of other needs, even as interest rates rise. interest increases.

Of course, home value gains vary greatly depending on where the owner lives. For example, homes in the northeast saw their value increase by less than 10%, while those in the south saw gains of more than 20%. Likewise, local demand plays a key role on which houses appreciate the fastest. In some regions, high-end homes are more likely to appreciate faster, while in other regions, entry-level homes are in higher demand and therefore appreciate faster.

4. The economic stimulus is running out and homeowners still need access to More funds
During the pandemic, the federal government issued three rounds of stimulus payments, equivalent to 478 million payments of $812 billion for the three rounds, and sent advance child tax credit (AdvCTC) payments to more of 36 million families, totaling more than $93 billion, according to National Taxpayer Advocate Erin M. Collins in her 2021 annual report to Congress.

While the stimulus package helped many Americans through tough times during the job shutdowns, some people simply got an influx of cash as they continued to work from home.

This money, although intended to help American workers, was also intended to stimulate the economy by increasing spending.

The checks had their intended effect as consumer spending increased, including an increase in home improvement projects. Americans were spending much more time at home and now had stimulus funds to help finance their projects.

Now, with stimulus funds running out, many Americans can get money out of their homes with a home equity loan to finish financing their projects rather than brave the fiercely competitive housing market at the looking for a new home.

5. Shortage of supply makes Americans reluctant to enter the housing market
After trying to rapidly increase imports to meet the growing demand created by the economic stimulus package, US ports became congested and supply issues became a major economic concern. Additionally, labor shortages have only further exacerbated supply chain constraints. It is expected that supply chain deficiencies could continue for the foreseeable future, at least until 2030. And with more than 11 million jobs available, it will not be easy to hire anyone. over the next seven to ten years.

The housing industry is not immune to supply chain issues. Materials are harder to acquire or have been out of stock for months. As a result, new home construction has slowed and, combined with what appears to be an insatiable demand for housing, the number of available homes is at an all-time low.

Building permits are up as homebuilders continue to strive to increase the supply of homes for sale, but weather, supplies and labor shortages are slowing growth. Even at high construction rates, it could take between five and eight years to restore the balance between supply and demand in the housing market.

These supply constraints and an ultra-competitive market have caused many homeowners to choose to upgrade their current home, rather than face high real estate prices, limited inventory and fierce competition in the home market. buying a house. As more and more homeowners choose to stay in their current home and renovate it, the demand for home equity loans will only grow.

With interest rates steadily rising, it’s safe to say that the refi boom has come to an end. While few borrowers will benefit from refinancing their mortgage, many now have unprecedented levels of equity to use to their advantage. A home equity loan allows these homeowners to access that equity and use it as they see fit without increasing the rate on their current mortgage.

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