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5 Reasons Home Equity Loans Are Coming Back

This piece originally appeared in the April 2022 edition of MReport magazine, online now.

After more than two years of a pandemic-inspired housing boom, the housing market is quickly shifting amid rising interest rates, higher home values, and a lower threat from COVID-19.

In March 2020, the housing market took an unexpected turn as the realities of the COVID-19 pandemic set in. States and cities began to issue stay-at-home orders and interest rates plummeted.

Throughout the pandemic, it was a tale of two worlds as many homeowners, now without a job, filed for mortgage forbearance in order to avoid foreclosure. Others, however, had the ability to work from home and observed plummeting mortgage interest rates. This created a surge of mortgage loan activity with existing homeowners eager to refinance or flip into new homes and new homeowners searching for their perfect home.

According to the Mortgage Bankers Association’s (MBA) March 9, 2022 Mortgage Application Report, refinances rebounded slightly by 9% week over week in response to a slight rate drop; however, refinance activity has plummeted 50% year over year. Forecasts project further interest rate increases and a resulting refinance activity decrease—effectively ending the refinance boom.

With this year’s change in the housing market, a new trend is likely to arise: home equity loans. In fact, below are five reasons home equity loan products that allow you to borrow against the equity in your home are likely to make a big comeback in 2022.

1. Spread of COVID-19 Slows in the U.S.
Over the past two years, the housing market became nearly impossible to anticipate as the COVID-19 pandemic became one of the most influential and unpredictable economic variables.

New COVID-19 variants and even the government’s response to rising COVID-19 cases and deaths became a top risk factor.

For economists, the pandemic was anything but boring. It became one of the greatest challenges to forecasting and remains one of the most important statistics for business leaders to follow. COVID-19 cases, hospitalizations, and death rates will have a greater impact on the economy than anything else.

While a new variant or risk could arise, for now, the United States is trending toward fewer cases, fewer hospitalizations, and fewer deaths, allowing many Americans to start heading back to normal life. At the end of February, the Center for Disease Control (CDC) announced that most Americans can stop wearing a face mask.

As economic risks from COVID-19 continue to fade, the Federal Reserve will become less concerned about pandemic-related economic volatility and more concerned about controlling inflation rates. Accordingly, as the Fed has indicated, they intend to increase interest rates throughout the course of the year.

2. Interest Rates Begin to Ascend
Mortgage interest rates have already begun to rise, moving from less than 3% at the end of 2020 to hovering around 4% in late February to early March of 2022. Rates will likely continue to increase throughout 2022 as the Federal Reserve takes more aggressive actions, by raising short-term interest rates to combat rising inflation levels.

The Federal Open Market Committee (FOMC) also raised rates again at their meeting in March, citing inflation as well as uncertainties surrounding the Russian invasion of Ukraine.

The Fed could raise rates by about one percentage point in 2022 and two to three additional percentage points in 2023. The result of these hikes to the federal funds rate will send mortgage rates soaring, ending 2023 in the 5.5% to 6% range.

With interest rates headed higher, fewer homeowners will be able to lower their monthly payment through a mortgage refinance. When mortgage rates reached nearly 4%, according to data from Freddie Mac, Black Knight sent out a report showing that just 3.8 million homeowners would benefit from a refinance. This is down from the 11 million who could benefit at the beginning of 2022, and down from 20 million in 2020.

However, as fewer homeowners are able to lower their monthly payments through refinancing or access their home’s equity through a cash-out refinance, a new type of borrower will emerge: those who want to pull cash out of their home without refinancing.

More and more homeowners will be looking for home equity loans in order to tap into the unprecedented levels of cash in their homes without increasing the interest rate on their current mortgage.

3. Home Prices Surge, Giving Homeowners Greater Access to Cash
Home prices surged to all-time highs, granting homeowners access to higher amounts of tappable equity than ever before.

Home prices rose 19.1% annually in January, an all-new record high, according to the latest CoreLogic Home Price Index (HPI). Overall, homeowners gained $250 billion in tappable equity in the third quarter of 2021, surging past the previous record highs, according to Black Knight’s Mortgage Monitor report.

“Home price growth in the third quarter—while less than half that of Q2’s history-making rate—added more than $250 billion to Americans’ already record levels of tappable equity,” Ben Graboske, Black Knight President of Data and Analytics, said in the report. “The aggregate total of $9.4 trillion is up an astonishing 32% from the same time last year and nearly 90% higher than the pre-Great Recession peak in 2006.”

Homeowners have access to more funds than they ever did before—an average $178,000 per homeowner. These unprecedented levels will drive homeowners to tap the accrued value of their homes via home equity loans for a variety of reasons, including home improvement projects, to pay down debt, and a multitude of other needs, even as interest rates rise.

Of course, the gains in home values vary significantly depending upon where the homeowner lives. For example, homes in the Northeast saw less than 10% increases in home value, while those in the South saw gains of more than 20%. Likewise, local demand plays a key factor on which homes appreciate in value the quickest. In some areas, high-end homes are more likely to appreciate faster, while in other areas entry level homes are in higher demand and therefore appreciating in value more quickly.

4. Economic Stimulus Runs Dry and Homeowners Still Need Access to More Funds
During the pandemic, the federal government issued three rounds of stimulus payments, equating to 478 million payments of $812 billion for all three rounds, and sent Advance Child Tax Credit (AdvCTC) payments to over 36 million families, totaling over $93 billion, according to National Taxpayer Advocate Erin M. Collins in her 2021 Annual Report to Congress.

While the stimulus package helped many Americans through hard times while jobs were shut down, some people simply received an influx of cash as they continued to work from home.

This money, while meant to help hardworking Americans, was also intended to stimulate the economy by increasing spending.

The checks had their desired effect, as consumer spending saw a boost, including a surge in home improvement projects. Americans were spending much more time in their homes, and now had stimulus money available to help fund their projects.

Now, with stimulus money running out, many Americans can draw cash out of their homes through a home equity loan in order to finish funding their projects versus braving the highly competitive housing market in a search for a new home.

5. Supply Shortage Makes Americans Wary of Entering Housing Market
After trying to rapidly increase imports to meet the growing demand created by the economic stimulus package, U.S. ports became clogged and supply issues grew to become a major economic concern. In addition, labor shortages only further exacerbated supply chain constraints. It is projected that supply chain deficiencies could continue for the foreseeable future, through at least 2030. And with more than 11 million available jobs, it will not be easy to hire anyone in the next seven to 10 years.

The housing industry is not immune to the supply chain problems. Materials are harder to acquire or are on back order for months. As a result, new home construction has slowed and, when combined with what seems to be an insatiable demand for housing, the number of available homes is at an all-time low.

Building permits are up as homebuilders continue to strive to increase the supply of homes for sale, but weather, supplies, and labor shortages are slowing the growth. Even at high building rates, it could take between five and eight years to bring supply and demand back into balance for the housing market.

These supply constraints and an uber-competitive market has pushed many homeowners to elect to improve their current home, rather than face elevated home prices, limited inventory, and fierce competition in the homebuying market. As more homeowners elect to stay in their current home and remodel, the demand for home equity loans will only continue to grow.

With interest rates trending steadily upward it is safe to say that the refi boom has come to an end. While few borrowers will benefit from refinancing their mortgage, many now have unprecedented levels of equity to use to their benefit. A home equity loan allows these homeowners to access and utilize that equity as they see fit without raising the rate of their current mortgage loan.

About Author: Dan Bailey

Dan Bailey is SVP of WFG Lender Services & WFG Enterprise Solutions. Bailey has nearly 20 years’ experience in the title insurance industry, where he began his career as a compliance officer for a national title insurance company. Bailey joined WFG as SVP in the Lender Services Division in 2013. In this role, he oversees operations for WFG’s Lender Services division, heads the company’s Enterprise Solutions sales team, and leads strategic direction for both organizations. Bailey is a graduate of the University of Pittsburgh School of Law and is a licensed attorney in New York and Pennsylvania.
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