U.S. homeowners are sitting on a record amount of equity after a surge in property prices.
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Americans have started cashing out some of the record amount of home equity they gained as property values surged during the pandemic.
Cash-out refinancings, meaning new loans that resulted in a lump-sum payout to the homeowner, were up 33% in October compared to a year earlier, according to data released Monday by Black Knight Inc.
U.S. home equity stood at a record $23.6 trillion at the end of the second quarter, according to Federal Reserve data. That’s almost double the level seen at the peak of the last real estate boom in 2006.
“We have record home equity thanks to record home prices,” said Dan Roccato, financial analyst with Credible. “We’ve had this incredible run-up in home prices over the last 18 months.”
The gains came after a Fed bond-buying program aimed at supporting the economy during the pandemic sent mortgage rates to rock-bottom levels. Cheaper financing means borrowers can qualify for bigger mortgages, fueling bidding wars.
Home prices surged a record 17% in 2021 from a year earlier, faster than the 11% gain in 2020 and the 5.4% increase in 2019, according to a forecast from Fannie Mae. In 2022, the pace likely will slow to 7.4%, the forecast said.
Sky-high sale prices don’t just impact homes that are on the market. Lenders who refinance mortgages require appraisers to weigh value based on so-called comparable sales, meaning recent transactions of similar homes in the area. So, when a neighbor sells a home at a jaw-dropping price, it increases the value of the surrounding properties, even if they’re not for sale.
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Not all home equity can be cashed out – lenders require borrowers to meet certain credit standards, and they typically cap mortgages at 80% of a home’s value.
The amount of U.S. tappable home equity, meaning the amount owners could cash out with a new mortgage, stood at a record $9.1 trillion in October, Black Knight said. In 2020’s first quarter, at the start of the pandemic, Americans held $6.5 trillion of tappable equity.
As the Fed prepares to taper its bond purchases and mortgage rates drift upward, fewer Americans are seeking refinancings just to lower their rates or shorten the term of their loans, said Scott Happ, president of Black Knight’s Secondary Marketing Technologies.
“The dynamics of the refinance market are changing, with a sharp shift away from rate and term refis to cash-out lending,” he said. “This shift tends to happen in any rising rate environment, never mind one in which American mortgage holders have more than $9 trillion in tappable equity.”