Homeowners are sitting on $6 trillion in available cash, but they're not tapping it

The big gains in home values over the last two years are starting to slow down, but U.S. homeowners are still reaping the rewards. As prices continue to rise, so too does the amount of home equity available for homeowners to tap; and it has now reached a record sum.

U.S. homeowners were sitting on over $6 trillion worth of collective tappable home equity at the end of June, according to Black Knight. Tappable equity is the amount most lenders will allow borrowers to cash out, while still keeping 20 percent equity in the home.

Borrowers gained $636 billion in the first half of 2018, pushing the total amount to nearly three times as much equity as there was at the housing market's bottom in 2012. It is also 21 percent more than there was at the pre-crisis peak in 2006.

Approximately 44 million homeowners with mortgages can now access cash through cash-out refinances or home equity lines of credit (HELOCs). On average, per person, that's about $138,000. But home equity lending is not increasing as much as one might imagine, given the potential windfall.

Homeowners withdrew about $65 billion in home equity in the second quarter of this year. That's an increase from the first quarter, but seasonally expected as homeowners tend to do more upgrades in the spring and summer. The draw was actually down 3 percent from the same period a year ago.

Homeowners withdrew just 1.13 percent of tappable equity, the lowest share since the start of 2014. Part of the reason may be that homeowners today remember what happened to the housing market a decade ago and have no desire to treat their homes like ATM's. Millions of borrowers ended up underwater on their mortgages, when home prices plummeted. But another factor is likely rising interest rates.

"We do see evidence that rising interest rates are generating some headwinds," said Ben Graboske, executive vice president of Black Knight Data & Analytics. "At this point last year, homeowners were tapping 17 percent more of available equity than today, which suggest that if rates on cash-out refinances and HELOCs had held steady, we'd see about $13 billion more equity being accessed."

While some homeowners are still highly conservative, housing wealth does appear to be driving consumer confidence. The preliminary September University of Michigan consumer confidence index jumped more than expected.

"Gains in household wealth were cited by near record numbers, primarily due to increases in stock holdings and rising home values," according to the report.

And the expectation is that homeowners will start to tap more equity in the coming year, especially for home renovation projects.

In 2018, remodeling spending by homeowners is estimated to increase by at least 5 percent in 41 of the 50 metropolitan markets tracked by Harvard's Joint Center for Housing Studies, and by 10 percent or more in 11 of these major metros, led by Kansas City, Charlotte, San Antonio, Dallas, and Sacramento. None of the 50 major metro areas tracked are projected to see spending decline in 2018.

That spending is expected to increase next year as well because fewer people are moving, due to higher home prices. There is still a critical shortage of homes for sale, and that is leading to more homeowners who might have wanted to move up, staying put. Also, as home equity rises, people want to protect their home—that is, their asset, more.

"When mobility is down, the longer you plan on staying in your home, the more you think about some of the less sexy projects," said Kermit Baker, senior research fellow at HJCHS. "That's true for windows, HVAC, siding and less glamorous projects. More focus on replacement projects as opposed to discretionary projects."

Remodeling spending is actually increasing more in the nation's more affordable markets. That is likely because homeowners there have less mortgage and more equity in their homes. In the most expensive markets, homeowners are more leveraged and have less money left over to put back into home improvement projects. Also, the more expensive the home, the less likely it is to need upgrades.

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