Why millions may be unable to access $730B home equity 'safety net'

by Alex Tanzi

Americans have amassed plenty of housing wealth in recent years — but millions of homeowners are finding they’re effectively locked out of accessing it, a new study found.

Higher interest rates and debt levels, along with pandemic-led disruptions to jobs and incomes, have made it more difficult for many US property-owners to tap home-equity loans and lines of credit, according to data from Point, a home-equity investment company.

Even after the jobs rebound of the past couple of years, the study found that almost 4.6 million homeowners with mortgages have experienced labor-market shifts that are associated with lower credit scores — blocking their access to the more than $730 billion in home equity that they hold. 

With the US economy forecast to slow down amid an escalating trade war, many homeowners likely don’t have much of an equity cushion they can rely on in practice — even though housing wealth has soared by some $18 trillion over the past five years, far outpacing the increase in mortgage debt. 

Home equity has traditionally helped American homeowners “in life’s periodic moments of economic need,” from home renovations and higher education to business ventures and elder-care, according to Point economist Aaron Terrazas. “This idea that home equity used to be a safety net, I’m not sure it is anymore,” he said. 

Refi Opportunities

Higher rates, coupled with negative career shifts, have upended income-to-debt ratios for millions of homeowners and made home-equity credit more expensive. Another route for US homeowners seeking a cash boost is refinancing. 

The more expensive mortgages that homebuyers have been taking out since the Federal Reserve began hiking rates three years ago are spreading through the market. Almost one-in-five mortgages had an interest rate above 6% at the end of last year, according to the Federal Housing Finance Agency. 

That’s creating a growing pocket of refinance opportunities in the event that mortgage rates fall. Still, there’ll probably need to be a drop of 100-150 basis points from where rates are now before it makes sense for people who bought at the peak to refinance, Terrazas says.

Homeowners with the means have been pulling some equity out despite the high cost. Balances on home equity lines of credit have risen by some $79 billion since hitting a low in early 2022, to reach $396 billion at the end of last year. Some borrowers are likely making the withdrawals in order to pay off even higher-rate debt, like on credit cards. 

Still, refusal rates for home-equity credit applicants are typically much higher than for mortgages — and more broadly, obtaining credit of all kinds is getting harder. That’s the case with mortgage refinancing too. 

More than 4 in 10 applications over the past twelve months were rejected, according to the latest New York Fed survey — the highest share in data going back to 2014. It suggests that homeowners who qualified for the initial purchase are now deemed ineligible for a new loan on the same property.