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Why Are Home Equity Lines of Credit (HELOC) on the Decline?

When homeowners build up enough equity, many have historically tapped into that value for a variety of purposes. According to recent figures, this has begun to change. Even though the amount of equity available is reaching new highs, cash-outs or home equity lines of credit (HELOCs) are falling.

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Home Equity Lines of Credit (HELOC) Are Dropping

According to federal data, homeowners in the U.S. now have over $15 trillion in accumulated equity. This is the highest level on record, with the last peak hitting just over $13 trillion in Q4 2005. Right after that peak, this figure began to plummet as more homeowners tapped into the equity on their homes. The low point for homeowner's equity took place in Q2 2009 as the Great Recession took shape and many homeowners were forced to walk away from their investments.

The highest level of accumulated equity today is coupled with the lowest number of HELOCs. According to recent data from Equifax, there now fewer HELOC accounts outstanding (around 11 million) than at any other time in the past. The highest number of outstanding accounts was in 2008 at about 15 million.

According to a Mortgage Monitor report released last year by Black Knight, homeowner equity grew by its fastest clip on record in Q1 2018. There was 7 percent growth, an increase of $380 billion, in a single quarter. But homeowners that had this equity only pulled out $63 billion, a decline of 7 percent from the prior year.

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What Is Leading to the Decline in HELOCs?

There are several potential reasons for the decline in HELOCs. First, more people are unwilling to use their homes to generate extra cash. Some hard lessons were learned after the last financial crisis and homeowners who either had to dig themselves out of debt or walk away entirely are not eager to repeat the process.

Between 2003 and 2007, homeowners were pulling over $350 billion per year out of the equity in their homes for a variety of purposes. Whether to pay for remodels, consolidate debt, or buy a new car, many who took this route did so in the belief that home values would never decline. According to the S&P/Case-Shiller U.S. National Home Price Index, values did fall 35 percent across the U.S. from February 2007 to February 2012.

Another factor contributing to falling HELOC usage is interest rates. According to Ben Graboske, EVP of Black Knight's Data and Analytics section, "One driving factor in the decline of HELOC equity utilization is likely the increasing spread between first-lien mortgage interest rates - which are tied most closely to 10-year Treasury yields - and those of HELOCs - which are most closely tied to the federal funds rate." As of the middle of 2018, that spread had increased to 1.5 percent, which was the biggest gap seen in a decade.

Economists at the Federal Reserve have weighed in on this as well. According to their thinking, the decline in people tapping into home equity is possibly due to several factors. First, many older, high-income, Americans hold this equity and aren't credit constrained. Second, Americans don't have housing price growth expectations that they did in the past, and some are curbing their spending. Finally, there is a tighter supply of HELOCs thanks to more stringent credit requirements for the loans.