Homeowners can't use their properties as piggy banks anymore
Homeowners are losing one of the biggest advantages they used to have over renters. Because of soaring interest rates, taking equity out of their properties is no longer that attractive an option.
According to the Federal Housing Finance Agency, cash-out refinances fell to less than 17% of total mortgages in the second quarter—a massive drop from 46.1% in Q1 2022.
The dip in refinances—where property owners borrow against the equity in their homes and use the money to pay down debt or remodel—was the lowest since late 2000.
“For now, refinance activity remains near record lows, with the overwhelming majority made up of cash-out lending,” said Andy Walden, vice president of enterprise research at Black Knight.
The drastic dip in refinancing began in the first quarter of 2021 and has worsened over the past two years.
In the first quarter of 2021, there were 1.84 million refinances where homeowners restructured their mortgage to get a lower interest rate. At the end of 2022, that number was just 9,701, according to mortgage data provider Black Knight.
Many homeowners who purchased their homes in 2020 or 2021—when interest rates were near record lows of 2-3%—will not see a need to refinance while interest rates remain high.
Buyers who purchased in 2022 faced an average interest rate of 5.34% and may look to refinance their purchases in the coming years if the Fed backs off its rate hike program.
“A growing pocket of opportunity exists to refinance recently-originated loans, should 30-year rates drop into the mid- to low-5% range,” Walden said.
But for now, the Fed is giving homeowners little choice but to stand pat.
That means less cash in homeowners’ pockets. Which means less spending on big-ticket items and less money to pay down other debt.
When will refinancing pick up?
In September 2022, roughly six in seven homeowners had a mortgage rate below 6%, according to Redfin data.
This means 85% of current homeowners are locked into an interest rate substantially lower than what is offered today, so they’re more than likely to remain in their homes until rates decline.
“The good news is that people who already own homes have locked in relatively low mortgage payments,” said Taylor Marr, Redfin’s deputy chief economist.
“The bad news is that homeownership is moving further out of reach for other folks as rising rates, elevated home prices and the persisting housing shortage make buying a house more expensive.”
The housing shortage, Mr. Marr describes, is partly driven by existing homeowners.
They simply don’t want to sell. Because selling would mean having to move and buy another house. Why risk selling when mortgage rates are double what you have now?
Economists are bearish on interest rates returning to 3-4% anytime soon, which means homeowners looking to get money out of their homes may need to look away from cash-out refinancing.
A home equity loan—where a homeowner borrows money against the home’s equity—may become a more attractive option as interest rates remain high.
According to Black Knight, U.S. homeowners have close to $16 trillion in home equity—and more than $10 trillion of that is considered tappable. Tappable equity is the percentage of a home’s value that can be borrowed against.
If cash-strapped homeowners can't find ways to get money out of their homes, it could have a ripple effect on the economy as consumers dial down their spending.