Nearly half of American homeowners will enjoy continued increases in their home equity this year, raising questions about how they will choose to leverage these gains now that the dust from the housing market implosion has settled, according to two recent research reports.
Lender loanDepot finds that 46 percent of all U.S. homeowners with a mortgage expect their equity to increase this year, after 60 percent of them already reported equity increases in the last three years.
Of those anticipating equity changes in 2016, 85 percent think it could rise as much as 10 percent, and another 27 percent expect it to increase between 6 and 10 percent.
Only 3 percent of homeowners expect their equity to fall in 2016, and 27 percent expect it to remain the same.
Values exceeding homeowner estimates
But some homeowners may not have a realistic picture of their equity situation, loanDepot said.
Still suffering from major losses experienced after the 2007 housing bust, only 58 percent of pre-2009 owners believe their homes have gained value since 2013.
That figure jumps to 64 percent for buyers who purchased after 2009 and didn’t experience drastic equity losses.
Many homeowners underestimate the amount of value their homes have gained throughout the housing recovery. Of those who believe their home’s value has increased since 2013, 27 percent believe it increased between 1 and 5 percent, loanDepot said.
In reality, loanDepot said the Case Shiller 20-city index shows that prices actually rose twice that much, or about 10 percent, from November 2013 to November 2015.
“Homeowners who bought during the housing boom are regaining equity many thought was lost forever, yet too many are not aware of the equity they have gained or they are unclear about how to determine changes in their equity,” said Bryan Sullivan, chief financial officer of loanDepot. “People who bought after the housing boom when prices were low are realizing homeownership can be a great investment and an asset that they can now leverage through equity to realize many dreams.”
Spending patterns pre- and post-crisis
This raises the question: How will homeowners choose to leverage their home equity? Will they use it to finance major expenses, such as medical bills, college tuition, a new car or debt consolidation?
According to a second report by CoreLogic, homeowner attitudes toward tapping into their home equity may depend on their experience during the housing bust.
CoreLogic’s white paper, “Home Equity Lending Landscape,” notes that home equity lines of credit (HELOCs) today are “not the HELOCs of yesteryear.”
According to CoreLogic, pre-crisis HELOCs were popular cross-sell and add-on products: Soon after clients would get a first mortgage, their lender would almost automatically follow up with a HELOC. It wasn’t uncommon to see combined loan-to-values (CLTVs) of 100 percent, and pricing at below prime.
Similarly, borrowers with small down payments were often presented with piggyback first and second loans as a way of avoiding mortgage insurance.
However, that changed once the financial crisis hit and borrowers in negative equity positions saw their lines “blocked” by lenders, CoreLogic said.
The presence of home equity seconds also slowed modification and short sale efforts, in many instances. Eventually, many of the homes backing these liens went into foreclosure.
As underwriting constricts, HELOCs gain strength
But today, thanks to the lessons learned from the financial crisis, most lenders have become more conservative in their underwriting. According to CoreLogic’s research, a new analysis of HELOCs originated in 2014 shows the average CLTV was about 61 percent.
The average credit score at origination in 2015 was a relatively pristine 774, more than 30 points higher than the average credit score for loans originated a decade ago.
Debt-to-income ratios (DTIs) continue to be in the 35-percent range, roughly where they have been since 2009.
Consequently, the average size of a HELOC during the first three quarters of 2015 was $118,694, up from $108,960 during the same period in 2014 and the $103,016 reported from 2004 to 2007. Last year, the monthly HELOC utilization rate averaged about 65 percent, compared with 71 percent from 2008 to 2011.
To see continued HELOC gains, CoreLogic said lenders need to target profitable customers who will access these lines early.
Typically, lenders are targeting prospects who have enough equity to justify a reasonably sized line of credit and the potential to draw against that line quickly, creating interest income for the lender.
CoreLogic also suggested that a recent resurgence in home remodeling could mean that homeowners will lean toward using HELOCs to add to, repair or enhance their homes.
To support this theory, CoreLogic pointed to data from the National Association of Home Builders (NAHB) showing that its Remodeling Market Index posted its 10th consecutive quarter above 50 points, a level at which remodelers feel confident about the market.
