Labor shifts could lock up $731B in home equity

Approximately 9% of American homeowners in a typical year experience a labor market event that could reduce their credit score.

This includes losing their jobs, getting a cut in compensation or deciding to become self-employed.

As a result, they could become locked out of traditional home equity lending options or the cash-out refinance market. That ties up $731 billion in property value these consumers are unable to access, according to Point, which offers home equity investment products.

Annually, about 1.5% of homeowners with a mortgage become unemployed, 6.4% experience a decline in their earnings, and 1.9% become self-employed, Point said in its report. But the total can range from 7.7% in a tight labor market as in 2022-2023 versus 9.7% in a more disruptive year like the Covid impacted 2020-2021.

Total and tappable equity held by U.S. homeowners

Americans held $17 trillion in home equity at the end of the fourth quarter, according to ICE Mortgage Technology. Of that, $11 trillion is considered to be tappable, meaning the homeowner maintains a 20% equity position in the property.

This was down from $17.2 trillion in home equity overall and $11.2 trillion in tappable equity in the third quarter.

Higher-for-longer interest rates have also impacted the refinance market, although recent data from the Mortgage Bankers Association and Optimal Blue showed lenders have loosened their credit offerings for these products.

While events of the past week are likely to result in changed mortgage rates when the Freddie Mac Primary Mortgage Market Survey is released on Thursday, from the start of March through the first week in April, the 30-year fixed has remained between 6.6% and 6.7%. 

"Millions of homeowners are facing a financial paradox: they've built up significant home equity but are unable to access it precisely when they need it most," said Aaron Terrazas, economist for Point. "With traditional home equity lending increasingly out of reach for many Americans, the industry is just starting to adapt to these new economic realities and develop innovative ways to provide homeowners with the financial flexibility they need precisely when they need it."

Impact variations by age, race and gender

Age, race and gender variations exist among the share of homeowners who could experience a negative credit shock event due to a labor market transition.

Non-white homeowners are more likely to be impacted than whites at 9.9% versus 8.8%. The rate for men is 9.5% but just 8.4% for women.

A separate study from Redfin found while home values rose 4.2% in Hispanic neighborhoods in 2024, it trailed white, up 5.2%; Black 5.3%; and Asian majority populated areas, 5.2%; mixed race neighborhoods reported a 4.7% increase in values.

The age group most likely to see their credit scores reduced due to a labor market shift is those between 35 and 49, at 10.5%, Point said. Those under 35 and between 50 and 64 both had a 9.9% share, while borrowers 65 and older had only a 5.4% share.

Regional variations on who experiences a credit shock are muted. In the Midwest, 9.1% of homeowners are estimated to be affected, followed by the South at 9% and the Northeast and West, both at 8.9%.

Because of differences in regional home equity, the West is the most impacted when it comes to value locked-in at $284 billion, followed by $247 billion in the South, $149 billion in the Northeast and $121 billion in the Midwest.

Hispanic homeowners have larger share of net worth in real estate

Home prices are growing faster in the Northeast and Midwest, where neighborhoods with majority white populations are more prevalent, while the Sun Belt region, where many majority Hispanic areas are located, price movements have stalled, Redfin said.

Hispanic households have a larger share of their net worth tied up in real estate, said Chen Zhao, Redfin's economic research lead.

"Hispanic home values fell furthest following the global financial crisis in 2008 and they rose the most at the peak of the pandemic home buying spree in 2021," Zhao said in a press release. "With a higher share of their net worth tied to real estate, market fluctuations matter more to Hispanic families and can impact how much they can afford to spend or borrow."

How interest rate shifts impact the appeal of cash-outs

Those higher interest rates also make doing a cash-out refi a less desirable proposition, Point argues.

In its example, Point uses a December 2018 home purchase for $230,000 at 20% down and a 4.6% interest rate.

If rates fell to 3.9%, the norm for the mid-2010 era, and assuming the home had appreciated to $354,711, a cash-out refi removing $50,000 from the property would have reduced the borrower's payment by $53 a month.

But at a rate of nearly 6.8%, and the other terms were the same, the payment would grow by $206 a month.