Home equity use is up, but still not at a "normal" level

American homeowners hold a large amount of potentially tappable home equity but usage rates remain low due to consumer reluctance, data from ICE Mortgage Technology found.

Its Mortgage Monitor report noted that while in the third quarter homeowner equity withdrawals through a second lien or cash-out refinance hit a two-year high, increased valuations translated to just 0.42% of the available tappable amount.

Today's rate is less than half of the 0.92% average extraction rate for the decade prior to the latest round of Federal Open Market Committee rate increases, noted Andy Walden, ICE vice president of research and analytics, in a press release. The FOMC ended the over two-year tightening cycle at its September meeting with a 50 basis point cut.

"Second-lien withdrawal rates are currently running more than a quarter below 'normal' and cash-out refi withdrawals are still down almost 70%," Walden continued.

Over the past 10 quarters, homeowners have extracted $476 billion in equity, which is exactly half of what was expected in more normal circumstances.

"That equates to nearly a half a trillion untapped dollars that hasn't flowed back through the broader economy," he said.

But some observers might consider it a good thing that homeowners are staying away from going into their equity given the overutilization that was a contributing cause to the Great Financial Crisis.

At the end of the third quarter, U.S. homeowners had $17.2 trillion of total equity in their properties. Of that, $11.2 trillion was considered to be tappable; that is if the property owner elected to turn some of that into cash, their equity position would still be at least 20%.

"On average, that works out to roughly $207,000 in tappable equity per homeowner," Walden said. "And we did see a bump in equity withdrawals in Q3, with cash-out refi extractions rising on what had been downwardly trending 30-year rates and second-lien home equity products getting a boost from rate cuts late in the quarter."

Total equity at the end of the second quarter was $17.6 trillion, with $11.5 trillion considered to be tappable.

But since the September FOMC meeting, mortgage rates — along with the 10-year Treasury yield — have climbed.

The Fed's 50 basis point short-term rate cut had a more positive effect on HELOCs given that interest rates for the two are more closely aligned.

"Since the Fed began its latest cycle of rate hikes, the monthly payment needed to withdraw $50,000 via a HELOC more than doubled, from as low as $167 per month back in March 2022 to $413 in January of this year," Walden said.

Investors are currently pricing in another 1.5 percentage points of Fed cuts through the end of 2025.

"If that comes to fruition, and current spreads hold, it'll have positive implications for both new equity lending as well as for consumers with existing HELOCs, with the payment on a $50,000 withdrawal falling back down below $300 per month, he said, pointing out that is a 25% reduction from the recent high but still above the 20-year average of $210.

"Given borrowers' recent sensitivity to even slight rate drops, this could serve to entice additional HELOC utilization, especially with mortgage holders sitting on record stockpiles of equity and locked into their current homes via low first lien rates," Walden predicted.

Meanwhile, the report also includes an update to its First Look data that reinforces the early figures by showing that about 350,000 borrowers affected by Hurricane Helene were having trouble making their mortgage payments in September.

Approximately 4.9 million mortgage borrowers owing a total unpaid principal balance of $1 trillion were in the path of either Helene or Hurricane Milton; almost 429,000 homes were hit by both natural disasters.

That is in addition to the roughly 1.2 million borrowers impacted by Hurricane Beryl in early July. A little but more than 1% of those consumers, almost 13,000 mortgage borrowers, fell behind in payments after that earlier storm.

As ICE previously noted, the full impact of the two latest storms will not be felt in the mortgage ecosystem until the October or November payment cycle.

But a look at the ICE McDash Flash daily mortgage performance data for October found the share of people who hadn't yet made their payment by the 15th spiked 2.8 percentage points in Buncombe County (the Asheville area), North Carolina. That equates to 5% of all the mortgage properties in that location.

ICE also found increases of between 1.4 and 2.1 percentage points in and around the Tampa Bay, Florida region municipalities of Tampa, Bradenton, and St. Petersburg.

The First Look report found the total delinquency rate for September was 3.48%, up 14 basis points from August and 19 basis points year-over-year.