Homeowners hold back on withdrawing home equity amid rising rates

"That's equivalent to $54 billion in 'missing' withdrawals"

Homeowners hold back on withdrawing home equity amid rising rates

Despite a rise in tappable home equity, high interest rates are causing homeowners to hold back on accessing this wealth, a recent report from Intercontinental Exchange (ICE) revealed.

According to the report, mortgage holders are currently sitting on $10.6 trillion in equity they could access while still holding on to a 20% equity stake in their properties.

However, while tappable equity is nearing its 2022 peak, homeowners remain cautious and choose not to extract this wealth.

Andy Walden, ICE’s vice president of enterprise research, highlighted that homeowners withdrew only 0.41% of available tappable equity at the beginning of the third quarter of 2023. This figure is about 55% lower than the average withdrawal rate observed over the past 12 years leading up to the Fed’s most recent tightening cycle.

“Indeed, in recent quarters, equity withdrawal rates have been running at less than half their long-run averages,” Walden said. “That’s equivalent to $54 billion – $250 billion over the last 18 months – in ‘missing’ withdrawals that might have otherwise stimulated the broader economy.”

The report also indicated a decrease in default and foreclosure activities attributed to rising equity levels. Foreclosure starts, though hitting an 18-month peak, remained 35% below pre-pandemic levels. Notably, 70% of overdue loans by three or more payments are being shielded from foreclosure through loss mitigation efforts. Over half (58%) of these delinquent borrowers have more than 20% equity stakes in their homes.

“Strong equity cushions not only provide borrowers an incentive to work with their servicers to return to making mortgage payments, but they also open up other options, such as salvaging earned equity with a traditional home sale rather than going through foreclosure,” said Walden. “The more the industry can do to educate and update borrowers on their equity positions, the better. Loss mitigation can be much more successful when a borrower can make educated and informed decisions, fully aware of the options available to them.”

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Additionally, the data showed that while refinance activity has decreased significantly from previous years, most remaining activity is focused on equity, with cash-outs comprising 92% of all refinances in Q3. The average cash-out amount has risen to a record $104,000, up from $65,000 two years ago.

In contrast, purchase loans led 86% of mortgage activity in the same quarter and are projected to form around 75% of all mortgage lending in 2024.

Purchase loan debt-to-income ratios have reached multiyear highs, reflecting the impact of mounting interest rate pressures. The ICE Market Trends data observed a tightening in lending criteria, with credit scores for conventional, FHA, and VA purchase loans reaching series highs in October. The average FHA score has increased by 14 points, and VA scores by 13 points over the past year.

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