The continuous rise in home prices has undeniably resulted in an increase in homeowner equity. However, the current situation doesn't necessarily offer homeowners much benefit. According to real estate analytics company Black Knight, homeowners are now tapping into a lower level of equity, and the main cause can be credited to higher interest rates.
In the second quarter, mortgage holders collectively withdrew $39 billion in home equity through second-lien home equity loans, lines of credit, and first-lien cash-out refinances. Although this represents an improvement compared to the $37 billion accessed in the first quarter of this year, it is significantly lower than the approximately $79 billion tapped in the second quarter of 2022.
The ultralow mortgage rates that were a result of the pandemic served as both a blessing and a curse for homeowners. For those who have no plans to move or renovate their current home, the recent increase in mortgage rates may not be of great concern. However, those who are dissatisfied with their homes might find themselves facing limited options.
Higher interest rates have made tapping into equity, which is a common method of financing home repairs and renovations, more expensive. In its September mortgage monitor report, Black Knight states that "rising interest rates are having a clear and decisive impact on both how and how much equity mortgage holders are willing to withdraw from their homes."
The report also reveals that, on average, homeowners have been withdrawing 0.92% of tappable equity each quarter from 2010 to 2021. However, this share has dropped to 0.4% over the last three quarters. As a result, the report suggests that nearly $200 billion of equity has remained untapped and has not circulated back into the broader economy since interest rates began to rise approximately 15 months ago.
The current landscape presents challenges for homeowners who are seeking financial flexibility through their home equity. The impact of higher interest rates is evident, as they influence both the decision-making process and the amount of equity homeowners are willing to access. This situation not only affects individual homeowners but also has implications for the broader economy.
Higher Mortgage Rates Impact Homeowners' Decisions
Data suggests that higher mortgage rates have significantly reduced homeowners' motivation to move. According to Redfin data covering the four-week period ending Aug. 27, active home listings remained well below year-ago levels throughout August.
Freddie Mac's weekly measurement of mortgage rates has consistently stayed above 6% this year, with the average 30-year fixed-rate mortgage reaching its highest level in decades at 7.23% in late August. Although there was a slight decrease last week, the subsequent increase in the 10-year Treasury yield may indicate another weekly gain this week.
These factors have led to a notable downturn in one of the leading indicators of future home sales: the Mortgage Bankers Association's seasonally-adjusted index measuring loan applications for home purchases hit its lowest level in 28 years last week, as stated by the trade group on Wednesday. Joel Kan, the deputy chief economist of the association, claimed that prospective buyers are holding back due to low housing inventory and the high mortgage rates.
Despite these challenges, the median home price in July increased by approximately 2% to $406,700 compared to the previous year, marking the first year-over-year gain since January, according to the National Association of Realtors. Lawrence Yun, the chief economist of the trade group, expressed optimism about this growth, stating that most homeowners are not concerned about potential declines in home prices and continue to benefit from significant wealth gains in recent years.
The strengthening home prices have also led to increased home equity. Black Knight reported that their measurement of tappable equity, which refers to the amount of equity that a homeowner could utilize while leaving 20% untouched, reached $10.5 trillion in June. This level is close to the analytics company's peak projection for 2022.
In conclusion, it is evident that higher mortgage rates have had a substantial impact on homeowners' decisions to move. The market has experienced a decline in home sales activity, attributed to low housing inventory and elevated mortgage rates. However, despite these challenges, home prices have shown signs of growth, contributing to increased home equity for homeowners.
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