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The next massive consumer tailwind? 💨
Surging home equity has gone largely untapped 🏠
In a research note Tuesday, Wells Fargo economists Tim Quinlan and Shannon Seery put a spotlight on a potential whopper: home equity.
“Strong home price appreciation in the years following the pandemic may be an underappreciated tailwind for the household sector,” the economists wrote. “The total value of the U.S. single-family market breached $40 trillion last year, and the mix between debt and equity has shifted over time with the portion held by homeowners in the form of equity trending higher since about 2012.”
The thought of using homes as collateral for cash will surely conjure bad memories from the housing bubble, when unsustainable debt loads eventually led the housing market to crash, sending the world economy into a financial crisis.
Of course, this time is a bit different. The economists offered some context (emphasis added):
…After the housing bubble burst in 2007, home values continued to fall on trend for the next several years, not bottoming until the first quarter of 2012 when the total value of the single-family housing market hit a cycle low [of] $17.9 trillion. Because many homeowners had taken out mortgages when home values were much higher, it was fair to say that households were deeply in debt. With $9.7 trillion in debt outstanding at that time, homeowners’ equity fell to 45.9%, its lowest point in figures that date back to the early 1980s.
…Home values have more than doubled in the 11 years since. Through the first quarter of this year, the single-family housing market was worth $41.2 trillion, a 129% increase from the 2012 low. Yet interestingly, mortgage debt has increased by less than a third of what it was then. The $12.5 trillion dollars in mortgage debt outstanding today represents only a 28.9% increase from its 2012 low… More to the point of our purposes in this report, homeowner equity now stands at 69.6%; that’s off slightly from its peak in Q2-2022, but higher than at any other point since the late 1980s.
In short, home values are way up, but debt loads are relatively light, and home equity is much higher.
Of course, attitudes toward debt and leverage are different today than they were years ago. This may explain why consumer finances remain robust today.
“Too much borrowing and excess leverage was one of the factors that contributed to the financial crisis 15 years ago, and no one is suggesting households start treating their home as though it were an ATM today,” the economists wrote. “Indeed, the slow growth of mortgages relative to home values since 2012 may be rooted in unhappy memories from the financial crisis and a reluctance to become overly reliant on credit today.”
That said, homeowners seem to be increasingly dipping their toes into home equity. The economists observed, “after declining on trend for nearly 13 years, home equity revolving credit balances rose for the fourth straight quarter in Q1.“
According to updated New York Fed data published Tuesday, balances for home equity lines of credit stood at $340 billion as of Q2, unchanged from Q1.
The economists’ speculate that one of the reasons for the recent uptick in home equity borrowing is due to the fact that credit card interest rates have surged and interest on home equity loans tend to be relatively attractive.
Their research note has many more stats and is worth a read. You can access it here.
What to make of all this 🤔
The idea of tapping one’s home for cash is surely fodder for those perpetually predicting doom for the economy.
I’m not going to advocate for borrowing against one’s home for the sake of keeping consumer spending going as households overextend themselves.
I will, however, say that the data above is more confirmation that consumer finances are in remarkably good shape. And we shouldn’t be surprised if spending continues to boom as consumer finances normalize.
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