5 reasons home equity loans are making a comeback

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This piece originally appeared in the April 2022 issue of Mreport Magazine, now online.

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

In March 2020, the housing market took an unexpected turn as the realities of the COVID-19 pandemic hit. States and cities began issuing house arrests, and interest rates plummeted.

It’s been a tale of two worlds during the pandemic, as many homeowners who are now out of work applied for a rebate on mortgages to avoid foreclosure. Others, however, have had the opportunity to work from home and have seen mortgage rates fall. This has led to a surge in mortgage lending activity from existing homeowners eager to refinance or converting to new homes and new homeowners looking for their perfect home.

According to the Mortgage Bankers Association (MBA) Mortgage Application Report dated March 9, 2022, refinancing recovered modestly by 9% week-on-week in response to a modest drop in interest rates; However, refinancing activity has collapsed by 50% year after year. Forecasts are predicting further rate hikes and a consequent drop in funding activity – effectively ending the funding boom.

With this year’s shift in the housing market, a new trend is likely to emerge: home equity loans. Below are five reasons why home equity products, which let you borrow against your home’s equity, are likely to make a big comeback in 2022.

1. Spread of COVID-19 Slows in USA
Over the past two years, it has been almost impossible to predict the housing market as the COVID-19 pandemic has become one of the most influential and unpredictable economic variables.

New COVID-19 variants and even government response to rising COVID-19 cases and deaths became a major risk factor.

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

While a new variant or risk could emerge, for now the United States is trending towards fewer cases, fewer hospitalizations, and fewer deaths, allowing many Americans to return to normal life. In late February, the Centers for Disease Control (CDC) announced that most Americans can go without wearing a face mask.

As the economic risks from COVID-19 continue to wane, the Federal Reserve will be less concerned about pandemic-related economic volatility and more concerned about controlling inflation rates. Accordingly, as the Fed has indicated, it intends to hike rates later this year.

2. Interest rates start to rise
Mortgage rates have already started to rise, moving from less than 3% in late 2020 to around 4% in late February-early March 2022. Rates are likely to continue to rise throughout 2022 as the Federal Reserve takes more aggressive action by reducing the short-term interest rates are raised to combat rising levels of inflation.

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

The Fed could hike rates by about a percentage point in 2022 and another two to three percentage points in 2023. The result of these Federal Funds Rate hikes will send mortgage rates skyrocketing, ending 2023 in the 5.5% to 6% range.

As interest rates rise, fewer homeowners will be able to lower their monthly payments through a mortgage refinance. As mortgage rates hit nearly 4%, according to data from Freddie Mac, Black Knight sent out a report showing only 3.8 million homeowners would benefit from a refinance. This is less than the 11 million that could benefit in early 2022 and less than 20 million in 2020.

However, as fewer and fewer homeowners are able to lower their monthly payments through refinancing or access their home’s equity through a payout refinance, a new breed of borrowers will emerge: those looking to pull cash out of their homes without refinancing.

More and more homeowners will look to home equity loans to tap into the unprecedented amount of cash in their homes without increasing the interest rate on their current mortgage.

3. Home prices are rising, giving homeowners better access to cash
Real estate prices soared to all-time highs, giving homeowners access to greater amounts of vulnerable equity than ever before.

According to the latest CoreLogic Home Price Index (HPI), home prices rose 19.1% annually in January, an all-time high. Overall, homeowners gained $250 billion in vulnerable equity in the third quarter of 2021, beating previous record highs, according to the Black Knight’s Mortgage Monitor report.

“Growth in home prices in the third quarter — although it was less than half that of the second quarter that made history — has more than $250 billion, the report says. “The total of $9.4 trillion is a staggering 32% higher than the same period last year and almost 90% higher than the pre-Great Recession peak of 2006.”

Homeowners have access to more funds than ever before — an average of $178,000 per homeowner. These unprecedented levels will prompt 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 debt, and a variety of other needs, even as interest rates rise.

Of course, gains in home values ​​vary significantly depending on where the homeowner lives. Homes in the Northeast, for example, saw less than 10% appreciation in value, while those in the South saw gains of more than 20%. Likewise, local demand plays a crucial role in determining which properties will appreciate in value the fastest. In some areas, high-end homes tend to appreciate faster, while in other areas, entry-level homes are more in demand and therefore appreciate faster.

4. Stimulus stimulus is drying up and homeowners still need access to it More funds
During the pandemic, the federal government issued three rounds of stimulus payments equaling 478 million payments totaling $812 billion for all three rounds, and sent Advance Child Tax Credit (AdvCTC) payments to over 36 million families totaling over $93 billion National Taxpayer Advocate Erin M. Collins in her 2021 Annual Report to Congress.

While the stimulus package helped many Americans through tough times when jobs were closing, some people simply received an influx of cash as they continued to work from home.

While this money should help hard-working Americans, it should also stimulate the economy through higher spending.

The checks had their desired effect as consumer spending experienced a boost, including a surge in home improvement projects. Americans were spending far more time in their homes and now had stimulus funds available to fund their projects.

Now that stimulus funds are running out, many Americans can take money out of their homes to complete financing for their projects through a home equity loan, rather than braving the fiercely competitive housing market to find a new home.

5. Supply shortages make Americans wary of entering the housing market
After trying to quickly increase imports to meet the growing demand created by the stimulus package, US ports became clogged and supply problems became a major economic problem. Additionally, the labor shortage only exacerbated supply chain constraints. It is forecast that supply chain deficiencies could persist for the foreseeable future at least until 2030. And with more than 11 million jobs available, it won’t be easy to hire anyone in the next seven to 10 years.

The housing industry is not immune to the supply chain problems. Materials are harder to come by or are months behind. As a result, new home construction has slowed and, combined with a seemingly insatiable demand for housing, the number of homes available is at an all-time low.

Building permits are rising as homebuilders continue to look to increase the supply of homes for sale, but weather, utility and labor shortages are slowing growth. Even with high construction rates, it could take five to eight years for supply and demand to rebalance in the housing market.

These supply shortages and an overly competitive market have led many homeowners to choose to improve their current home rather than face increased home prices, limited inventory and fierce competition in the home buying market. As more homeowners choose to stay in and remodel their current home, the demand for home equity loans will continue to grow.

With interest rates steadily rising, it is safe to say that the refi boom is over. While few borrowers are benefiting 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 interest rate on their current mortgage loan.

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