The Conservative US Home Owner
The December rate hike has been the talk of the town recently. Last week’s unemployment report substantiates the argument that US economy has met the criteria for a rate increase. However there is one data point that has been a matter of concern for the Fed, the inflation number. Even though the consumer confidence as well as consumer prices have increased as per the latest data from September, the inflation rate has been below the 2.0% mark. One contributor to a lagging inflation rate (apart from the declining oil prices) is the reluctance of the US homeowners to spend their home equity/wealth. American homeowner’s housing wealth is playing a much smaller role in the overall economy than it did before the downturn.
Home equity has roughly doubled to $12.1 trillion since house prices hit bottom in 2011, according to the Federal Reserve. Hence Home Equity, a key gauge of housing wealth, as a share of real-estate values is nearing the point seen a decade ago.
Such a level of equity is expected to provide a double-barreled boost to the economy by providing owners with more money to tap and making them feel richer (Than they are) and likelier to spend. However, that newfound wealth has had little effect on behavior.
In the first half of the year, owners borrowed $43.5 billion against their homes with home-equity loans and lines of credit, according to trade publication Inside Mortgage Finance. That was 45% higher than in the first half of 2014, but scarcely a quarter of the amount seen when equity was last as high in 2007.
Home equity’s effect on consumer spending is at its lowest ebb since the early 1990s, according to Moody’s Analytics. The research firm estimates that every $1 rise in home equity in the fourth quarter of 2014 would translate to only two cents of extra consumer spending over the next 1 to 1½ years.
The impact is more muted now despite the fact that home equity per homeowner has roughly doubled. At the end of the second quarter, the figure was about $156,700, up from $81,100 in the second quarter of 2011.
So why aren’t the homeowners feeling the flush? On reason might be that many owners might not even realize they have equity to tap. And there is data to back up that claim. The percentage of homeowners who were underwater, or owing more on their mortgage than the home’s value, dropped to 8.7% by mid-2015 from 21% at the end of 2011. Yet the percentage of homeowners who thought they were underwater fell by merely one percentage point to 27%. Another reason could be the fact that the consumers have become more conservative financially than they were 10 years ago. They realize that house prices can be volatile.
Mortgage lenders also aren’t giving owners access to as much equity as they used to. While it was common during the boom to see loans that took out 100% or even more of a home’s value, now few will let an owner take out more than 80%.
Finally, other kinds of loans are cheaper, removing one incentive to tap home equity. Six years ago, the average five-year new-car loan had an interest rate of 6.83%, versus 5.56% for a $30,000 home-equity credit line. But in the week ended Nov. 11, the average interest rate for a five-year new-car loan was 4.3%mversus 4.74% for the home line equity.
Home equity as a share of real-estate values at the end of the second quarter was 56%, according to the Federal Reserve, not quite back to the level of 60% seen in the boom. That means Americans’ mortgage debt is still elevated relative to home values, which could be another factor affecting the decision of whether or not to cash out equity.
Well, all is not lost. In many metro areas, home prices have overtaken or are about to overtake their boom-era peak. About 38% of metro areas had prices above their pre-2009 peak at the end of the third quarter, up from a 30% level last year. A further 13% of metros are within 5% of their prebust peak. That’s important, because it means new home equity is being created rather than merely making up for lost ground. It also means fewer homeowners are underwater.