Editors' pick: Originally published Feb. 16.
You may like the idea of owning your own home, but you still aren't all that comfortable with spending the equity you've built in it.
Roughly 59 million American adults (one in four) are considering buying a home this year, according to a new report from Bankrate. Even though the National Association of Realtors and U.S. Census Bureau report the total amount of existing and new home sales in 2016 at around 6 million, total housing inventory ended 2016 at the lowest level since it began tracking the supply of houses in 1999. Older Millennials (ages 27-36) and Gen X-ers (37-52) are most likely purchase a new home this year, with 20% of both age groups interested in doing so.
"Among Millennials, there's a lot of pent-up demand for home buying," said Bankrate senior mortgage analyst Holden Lewis. "They have been stymied by stagnant wages, student loans and a lack of available starter homes. If enough affordable homes are put on the market, we might see a surge of first-time homebuyers in their early to mid-30s."
They'll just have no interest in using that home equity for a while, much like every other homeowner in the U.S. According to a survey by TD Bank's Philadelphia Home Show Survey, 58% of of homeowners say they have not used a home equity line of credit (HELOC). Though 74% of respondents said that their property value increased or stayed the same over the last 12 to 18 months, 75% say they won't consider using a HELOC in the near future.
It's not that they don't have a need for it. Roughly 61% of homeowners would like to use a HELOC to renovate their existing home. However, just 31% think now is the right time to do so, with 72% worried about a possible rate hike by the Federal Reserve this fall.
"Eight years ago, the economy was struggling and home values were declining, but now homeowners have built back their equity," says Mike Kinane, senior vice president of consumer lending products at TD Bank. "HELOCs are a great way to not only renovate home projects, but also to use for debt consolidation, financing a new car, wedding costs or college tuition."
They just have some strings attached. In a way, Kinane is right. By the third quarter of 2016, property data firm CoreLogic says home equity grew 10.8% from the previous year. That's an average of $12,500 and $227 billion in total equity. However, the amount of outstanding home equity lines of credit dropped $20 billion during that same span to $472 billion of all U.S. debt, according to the Federal Reserve Bank of New York. That's less than U.S. credit card debt ($747 billion), auto loan debt ($1.14 trillion), student loan debt ($1.28 trillion) and mortgage debt ($8.35 trillion). It was also the only large segment of U.S. debt to decrease year over year. Not surprisingly, its 2% delinquency rate is a fraction of the 7.2% of credit card bills paid late and 11.1% of student loans that have fallen behind.
Homeowners and homebuyers are still haunted by the memory of "underwater" homeowners during the recession being stuck with homes worth less than they owed in loans.With the U.S. housing crisis at its depths in 2012, according to RealtyTrac, more than 12.8 million U.S. homeowners (29%) were seriously underwater. By the end of last year, that number fell to 5.4 million (9.6% of all mortgaged properties), while the number of equity-rich homes (with at least 50% positive equity) has climbed to more than 13.9 million, or 24.6% of all mortgaged properties. The number of equity rich homeowners has increased by nearly 4.8 million over the past three years, a rate of about 1.6 million each year.
"Despite this upward trend over the past five years, the massive loss of home equity during the housing crisis forced many homeowners to stay in their homes longer before selling, effectively disrupting the historical domino effect of move-up buyers that feeds both demand for new homes and supply of inventory for first-time homebuyers," says Daren Blomquist, senior vice president at ATTOM Data Solutions, RealtyTrac's parent company. "Between 2000 and 2008, our data shows the average homeownership tenure nationwide was 4.26 years, but that average tenure has been trending steadily higher since 2009, reaching a new record high of 7.88 years for homeowners who sold in 2016."
According to the National Association of Realtors, the median existing home price of $232,200 in December was 4% higher than it was a year earlier. That marked nearly five consecutive years of price increases, even as the interest rate on a 30-year fixed-rate mortgage rose from 4.01% at the end of 2015 to 4.32% by the end of last year, according to Freddie Mac. Total housing inventory at the end of December dropped 6.3% from a year earlier 1.65 million existing homes available for sale -- the lowest level since 1999. Unsold inventory is at a 3.6-month supply, which is still well below the six-month supply that's considered ideal.
"Constrained inventory in many areas and climbing rents, home prices and mortgage rates means it's not getting any easier to be a first-time buyer," says Lawrence Yun, chief economist at the National Association of Realtors. "It'll take more entry-level supply, continued job gains and even stronger wage growth for first-timers to make up a greater share of the market."
Unfortunately, home equity ends up being a large part of most homeowners' future financial planning. According to the Center for Retirement Research at Boston College recently found that Americans over the age of 65 often have more cash in their homes than in 401(k)s, IRAs or other investments. The average U.S. homeowner age 65 through 74 has $125,000 in financial assets. By comparison, those same individuals have an average of $150,000 in home equity. That disparity grows to $115,000/$160,000 between the ages of 75 and 84.
The Center also points out that roughly 30% of all income for folks ages 65 through 74 goes into utilities, taxes and upkeep on their homes. Meanwhile, the growth of home values in recent years has only given retirees more equity to work with.
It just requires a lot of sacrifice to earn that equity. Over 80% of current homeowners say their mortgage payment is preventing them from saving more money. In fact, more than one in three mortgage holders report that their monthly payment has a "major impact" on their ability to save. That number jumps to over 50% for parents.
That's where a HELOC could come in handy, assuming you understand the intricacies of the loan. For the first ten years of a HELOC - known as the draw period - a borrower can borrow money and pay it back as they wish, with only a minimum, interest-only payment required. When those ten years are up, though, that line of credit shuts down and the outstanding balance requires payments to both the principal and interest, which can draw out to as many as 20 years.
Greg McBride, chief financial analyst for Bankrate.com notes that a $30,000 balance at a rate of 3.25% would require a minimum payment of $81.25 during those first ten years. However, that same $30,000 balance on a 20-year repayment schedule of principle and interest more than doubles the monthly payment to $170.16.
"It is this conversion from interest-only payments to principal and interest payments that could pose problems for unsuspecting or ill-prepared borrowers," McBride says, "particularly at a time when household budgets are still very tight and income gains have been hard to come by."
Even the TD Bank has found that homeowners are uncertain and confused about the terms and conditions of a typical HELOC. The majority (63%) of Baby Boomers how a HELOC's expiration will affect their monthly payment, compared to 9% percent of Millennials. Over half (55%) of Baby Boomers have no plan for what to do when their loan's draw period ends, compared to just 6% of Millennials.Yet there are options for HELOC borrowers facing the end of their draw period. A quarter plan to refinance their HELOC into another loan, with 35% planning to use their equity as an emergency fund, 27% plowing it back into their homes through renovations and 26% planning to use it to travel.
"HELOCs can be a smart and flexible way for consumers to make home renovations, consolidate debt, pay for education, or deal with unexpected expenses," Kinane says. "It's important that HELOC borrowers plan ahead and review their contract to determine the best course of action based on their current and future financial situations."