Homeowners Are Tapping into Equity at Greatest Rate in Five Years

Mortgage loan application volumes may have been uneven throughout much of the summer, but homeowners are tapping into their renewed equity at historically high levels.

The latest U.S. Home Equity Line of Credit Trends Report from industry analysis service RealtyTrac revealed HELOC originations occurred at their greatest pace in five years during the 12-month period extending from June 2013 through June 2014. HELOC originations were up 20 percent on a year-over-year basis, in large part due to the sharp rates of property value origination seen in many local housing markets over that same time.

Not since June 2009 have HELOCs been employed by homeowners with the same level of frequency, and although the rate exhibited over the past year still pales in comparison to the pre-recession pace, it's clear many Americans have been able to capitalize on their accrued household wealth. The next step in the market's sustainability will be for more of these property owners to seek returns through sales - generating healthier rates of purchase activity by turning things over to a new generation of buyers.

HELOC originations accounted for more than 15 percent of total loan activity through August 2014, according to RealtyTrac data, representing the greatest proportion since 2008. As Chief Economist Daren Blomquist noted, the trend reflects a shift away from refinancing and underscores the improved rates of mortgage fulfillment displayed throughout the national market.

"Nearly 10 million homeowners nationwide, representing 19 percent of all homeowners with a mortgage, now have at least 50 percent equity in their homes, according to RealtyTrac data," Blomquist said. "Meanwhile, the percentage of homeowners with severe negative equity has decreased from 29 percent in the second quarter of 2012 to 17 percent in the second quarter of this year. The rise in HELOCs also reflects a natural evolution for a lending industry looking for products they can offer to homeowners who have already refinanced their first position loan into a low fixed rate."

Replacing Refinancing

The advantage for homeowners utilizing HELOCs, as opposed to refinancing, is in their ability to maintain a low mortgage interest rate derived from their first-position loan. In essence, they're capitalizing on the two greatest advantages the housing market has offered over the past couple of years: property value appreciation and favorable borrowing terms.

Year-over-year increases for HELOC originations were recorded in 49 of the country's 50 largest metro areas, with those where appreciation rates were most substantial generally displaying the highest rate of homeowner utilization. The largest annual increases were seen in Southern California's Riverside-San Bernardino area (87.7 percent), Las Vegas (85.1 percent); Cincinnati (81 percent), Sacramento, California (65.1 percent), and Phoenix (60.1 percent). To varying degrees, each of those markets has actually benefited from the foreclosure crisis, which led to many distressed local properties being purchases by investors, who rehabilitated and resold them at higher prices, thereby helping drive up the values of neighboring homes.

The least significant increases in HELOC originations on a year-over-year basis were seen in the Minneapolis-St. Paul (0.2 percent), Louisville, Kentucky (3.3 percent), Philadelphia (3.6 percent), Virginia Beach, Virginia (4.3 percent), and St. Louis (5.6 percent) metro regions.

Perhaps not coincidentally, mortgage application rates continued their up-and-down third quarter through September, leveling out at a seasonally adjusted annual rate of 425,000 units according to the Mortgage Bankers Association. New home sales activity proceeded in fits and starts for much of the summer. Still, there's a sense of optimism circulating among home builders, who see a market for not only renovations often financed by HELOCs, but late-season sales buoyed by an improving job market and economy that's promoting enhanced household wealth.