American homeowners have a record amount of wealth in their homes they can tap, but few of them are.
Total home equity in the U.S. rose to its highest level ever at $6.5 trillion in the first quarter before the coronavirus pandemic took hold, according to Black Knight, a loan research and analytics firm, up from $6.2 trillion at the end of 2019.
But the share of cash-out refinances, which unlock that wealth, fell to a four-year low. As of June, there were no indications that cash-out refinances were on the rise, Black Knight found, even as the pandemic continues to financially strain many U.S. households.
Why homeowners aren’t tapping their equity is twofold, experts said. Homeowners are reluctant to drain that wealth, while banks are reticent to lend to riskier borrowers in such uncertain economic times.
‘It’s often a no-can-do’
Tighter credit standards in the first quarter discouraged borrowers from tapping into their home equity. The median score of new borrowers was 773, a 14-point jump from 2019, according to the New York Federal Reserve’s report on household debt.
Nearly a third of senior loan officers reported that they had somewhat or considerably tightened their bank’s credit card standards, according to the Federal Reserve’s survey of senior loan officers.
“Equity is the lender’s protection against uncertainty,” said Kevin Leibowitz, president at Grayton Mortgage, a mortgage brokerage firm. “Those with a weaker credit score it’s often a no-can-do. Below 680, [it] is very difficult and very expensive to take equity out.”
Cash-out refinances accounted for just 42% of all refinance loans in the first quarter. This was the lowest share since the first quarter of 2016.
“The door got slammed large in March,” Leibowitz said, “and pried open recently for those who fit a strong profile.”
Earlier this year, major financial institutions such as JPMorgan Chase would not take mortgage applications with credit scores below 700. Chase and Wells Fargo also stopped offering home equity lines of credit, another vehicle homeowners have to tap their equity.
Credit standards on mortgages for borrowers with subprime, or blemished credit, have also tightened. About 1 in 7 lenders said they tightened standards considerably, according to the Federal Reserve’s survey of senior loan officers.
‘Americans no longer view their homes as ATMs’
Another reason homeowners aren’t tapping into their home’s built-up wealth is simply because they aren’t interested in doing so, another expert said. The residual effects of the financial crisis still haunt many homeowners.
“The 2007 housing bust and the ensuing Great Recession burst several long-held assumptions about homeownership,” said George Raitu, senior economist at Realtor.com, a real estate listing site. “The massive loss in values drove home the point that house prices can decline, and a leveraged property could be at significant risk of default for a homeowner facing job or income loss.”
Home prices fell by nearly 33% during the Great Recession, according to a study by CoreLogic, a business intelligence firm.
Read more: When to refinance a mortgage
“As a result, the past decade has seen lower levels of activity on cash-out refinances, home equity loans, or home equity lines of credit,” Raitu said. “Even with the solid economic gains of the 2010-2019 period and strong growth in equity, Americans no longer view their homes as ATMs.”
During the pandemic, Americans have also remained frugal, keeping their dollars closer to their chests.
While jobless claims grew, the overall household savings rate in April skyrocketed to 33%, a record high followed by 23.2% in May, still historically high. Americans borrowed less, too, with the total sum of credit card debt falling by more than $34 billion from the previous quarter, according to the New York Fed.
Raitu added that both baby boomers and millennial activity is fueling these trends. Baby boomers would much rather pay off their existing mortgages than tap into their equity, he said.
“For retiring baby boomers, paying off a mortgage became important,” Raitu said. “As a result, close to 40% of homeowners this year own their properties free of mortgages.”
As for millennials, he said most would rather refinance their existing loans than drain the accumulated equity.
“For millennials, low mortgage rates drove the mortgage purchase market,” Raitu said. “With declining interest rates, homeowners have chosen to lower their monthly payments and create additional cash flow for home improvement projects, rather than borrow against their equity.”