More Americans are choosing not to tap into their home equity Kenneth R. Harney on Apr 19, 2019 WASHINGTON – American homeowners are doing something surprising- Despite record amounts of home equity available to them – an estimated $1.5 trillion worth – they are tapping into it less via home-equity credit lines (HELOCs) and cash-out refinancings. The big question is why. Are people simply getting more frugal? Or are other forces at work? Economists who specialize in housing aren’t totally sure, but everyone agrees- Homeowner behavior has changed from previous years. Cash-out refinancings use the home’s increased equity as collateral to extract money. After the refinancing, the borrower has a new loan, but with a larger amount of debt on the house. HELOCs leave the owner’s existing mortgage intact but add a second mortgage that takes the form of a line of credit, allowing the owner to withdraw funds whenever desired. Both forms of equity extraction have been popular for decades and hit historic highs during the housing boom years a decade ago. Recently, however, activity has declined. Consider- – In the final quarter of last year, the lowest share of available equity was withdrawn since 2012, according to Black Knight Inc., a data and analytics company that tracks the mortgage industry. HELOC withdrawals were down 10% compared with the same period the year before, hitting the lowest level in nearly four years, while cash-out refinancings were down 21% year-over-year. Based on a benchmark in 2017, Black Knight estimates that more than 600,000 homeowners may have chosen not to tap their equity last year – 300,000 potential HELOC borrowers and 330,000 cash-out refinancers. – The volume of cash-out refinancings “remains much lower than in the previous decade,” according to mortgage investor Freddie Mac. Adjusted for inflation in 2018 dollars, an estimated $14.8 billion in net equity was cashed-out during the final quarter of last year, down from $20.4 billion a year earlier and dramatically below the $104.8 billion in the second quarter of 2006, near the peak of the boom. What’s contributing to these declines? Interest-rate movements for sure. Rate swings can discourage owners from tapping into their equity. For example, if you have a fixed-rate mortgage at 3.5%, you might think twice about giving it up for a cash-out refi that puts you into a new 30-year mortgage with a fixed rate of 4.5% or more. HELOC rates also increase when short-term rates rise, discouraging potential borrowers. economists argue that interest rates alone aren’t driving the recent downtrend in home-equity borrowings. Sam Khater, chief economist of Freddie Mac, believes that significant numbers of owners are shying away from loading on debt because of what they saw or experienced during the Great Recession. “I think it’s the legacy and the impacts” of the recession “that are still fresh in many people’s minds.” They have “fundamentally changed” attitudes about the debt loads on their homes, he told me. “It’s a scarring effect,” he said, and it’s making many Americans “much more conservative” about tapping into their equity. Millions of owners who had taken out HELOCs during the boom – leveraging their equity to the hilt – ultimately lost their homes in the crash that began in 2008. Many still have not recovered; others find themselves underwater with no or minimal equity as the result of piling on too much debt immediately before home values plunged. From both a societal and economic perspective, the downtrend in equity borrowings “is good news,” said Khater, “because we have a much bigger cushion” in the event of another financial crisis. Another factor- Since the crash, banks have become much pickier about who qualifies for equity products and who doesn’t. During the boom years, lenders allowed just about anybody to tap into their equity, even if they had poor credit histories. Today, by comparison, borrowers generally need high credit scores and significant equity to get HELOCs, and that excludes large numbers of potential applicants and lowers total volumes. “It’s a market mismatch,” says Tendayi Kapfidze, chief economist for Lending Tree, an online mortgage platform. People who might be eager to borrow against their equity – but don’t have the credit to qualify – are now essentially cut off from HELOCs. Still another force at work, according to Kapfidze- People who can’t qualify for HELOCs may be turning to the burgeoning market in personal loans, which are primarily marketed by non-bank lenders. A notable drawback- Personal loans are not secured by home equity so their rates can be high, ranging from 5% to more than 35%. Ouch!

Strong spring real estate season shaping up – but who’s got the advantage? Kenneth R. Harney on Apr 12, 2019 WASHINGTON – Have we arrived at one of those rare Goldilocks moments in real estate, where the market works well for sellers and buyers, strongly favoring neither? Maybe. Based on the latest national consumer-sentiment survey by mortgage investor Fannie Mae, American consumers appear to think so. They’re more positive about the overall direction of the housing market than they’ve been in nearly a year. Growing numbers think it’s a good time to sell and a good time to buy. They expect their own personal financial situations will improve this year, and they believe that interest rates for home loans will continue to remain relatively affordable. Housing and mortgage economists tend to agree. As Michael Fratantoni, chief economist of the Mortgage Bankers Association, told me- Six months ago, “I was guardedly optimistic. Now I’m just plain optimistic.” Mark Fleming, chief economist of First American Title Insurance, says- “So far in 2019, we’ve seen mortgage rates decline and wages rise – both trends work to boost home-buying power and fuel greater market potential for home sales, setting the stage for a stronger than expected” season. Yet some economists warn that things are not necessarily as rosy as Fannie’s consumer survey would suggest. They point to troubling signs- Total home sales on a national basis continue to decline. That pattern historically has been a leading indicator that prices could actually fall during the year ahead, ending years of nonstop appreciation. Plus, houses are taking longer to sell – many owners are having to cut their asking prices. The days of widespread bidding wars are over. So what’s really going on, and how do you relate it to your own situation, either as a potential buyer or seller? Some hard facts- – Prices are still rising, but at a slower rate than in recent years past. The median home listing price hit $300,000 last month for the first time ever, a 7% jump over the previous year, according to Realtor.com. Fratantoni predicts price increases will moderate to an average of just 4% this year, 3% next year and 2.5% in 2021. – A notable percentage of sellers’ asking prices are being reduced. In the four weeks ending March 24, prices on nearly 21% of all listings nationwide were cut, according to Redfin, the real-estate brokerage. Just 16% of offers written by Redfin agents encountered bidding wars during the first three weeks of March, compared with 61% during the same weeks in 2018. – Interest rates have been a great stimulus and are key to a strong spring. Lower rates are good for buyers, good for sellers. Last fall, average rates for a fixed-rate 30-year mortgage hovered near 5%, according to data from investor Freddie Mac. In the first week of April they averaged 4.08%. Homeowners and would-be buyers have responded enthusiastically to the lower rates, sending applications soaring by 18.6% during the week ending March 29 compared with the week earlier, according to the Mortgage Bankers Association. – Inventories of available homes for sale continue to rise – meaning more choices for shoppers, according to National Association of Realtors researcher Michael Hyman. Listings nationwide were up by 3.2% year-over-year in February. That’s generally a good sign for buyers because it helps keep price pressures down. But homes for sale in the primary entry segment for first-time home buyers – houses priced under $200,000 – dropped by 9% year-over-year, according to Realtor.com, while they grew by 11% in the upper price brackets over $750,000. All this is well and good, says Issi Romem, chief economist for realty marketing and data site Trulia, but the reality is that the housing market is in cyclical slowdown mode. Inventories of available homes may be increasing, but part of the reason is that houses are staying on the market unsold for longer times in many areas. The price cuts and longer days-on-market times reveal that significant numbers of “sellers are facing greater difficulties in selling.” Romem and Trulia Senior Economist Cheryl Young issued a report last week that runs counter to the cheery outlook prevailing in the industry. “[It] is possible,” they say, that “by fall or next year prices might modestly decline.” What that means is that the Goldilocks theory and perceptions of balance between sellers and buyers may not be quite right. Advantage- buyers.