Increasing home prices have pushed equity extraction and driven a remodeling boom
Since 2012, home prices have risen continuously, providing borrowers with large amounts of home equity. At the end of the first quarter of 2022, the average borrower had $280,000 in home equity — this is a gain of $64,000 over the past year and $125,000 over the past five years.
High amounts of home equity can not only cushion borrowers from defaulting on their mortgages, but increased equity also provides homeowners with the opportunity to extract equity for debt consolidation and other expenses.
When mortgage rates hit record lows in 2021, many homeowners who wanted to extract equity from their properties opted to refinance their entire mortgage and take the cash out. As a result, cash-out refinance dollar amounts increased by 35% from 2020 to 2021.
Borrowers also increased their use of home equity loans starting in 2021. After decreasing from 2018 through 2020, in 2021, the dollar amount of approved lines of credit reached its highest level since 2007 when it increased by 23%1.
Mortgage rates began increasing in April of this year, and with that increase came a shift in equity extraction. Higher mortgage rates can make cash-out refinances less attractive and make lines of credit more attractive, especially if borrowers hold a mortgage with a very low interest rate. The use of cash-out refinancing increased by just 3% in Q1 2022 compared to a year earlier. However, the use of home equity lines of credit increased by 29%.
A low supply of available homes for sale put upward pressure on home prices and kept many homeowners in their current homes, which, in turn, fueled a remodeling boom. Remodeling expenditures rose to $391 billion in Q1 2022, the largest figure in over 25 years2.
While we forecast continued home price increases, those increases are predicted to slow to 5% by May 2023. This will similarly slow the rate of home equity gains.
Furthermore, the increases in mortgage rates to the highest levels in more than 13 years will make borrowing more expensive and could slow the rate of home equity extraction. However, the already-high amounts of home equity and low supply of homes on the market means that remodeling activity should remain strong through the next year.
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[1] Source: CoreLogic Public Records (second-lien HELOCs placed more than 60 days after first lien)
[2] Source: Harvard University Joint Center for Housing LIRA, Bureau of Labor Statistics CPI Less Shelter. Improvements include remodels, replacements, additions, and structural alterations that increase the value of homes.
