Vulnerable equity hit a new record in the third quarter, and the rate at which people were refinancing to withdraw money from their homes soared to multi-year highs, according to Black Knight's latest Mortgage Monitor report.
The amount of money homeowners could access while holding at least 20% of the equity in their homes rose from nearly $ 9.2 trillion in the previous quarter to more than $ 9.4 trillion. In the first quarter, owners had just $ 8.1 trillion in tangible equity, and by the end of 2020 they had $ 7.3 trillion.
The market also recorded historically high refinancing volumes through cash-out. More than half, or 54% of the refis in the market were withdrawals during the reporting period, when the dollar volume in question rose from $ 63.1 billion in the second quarter to $ 70.5 billion and $ 46.3 billion a year earlier. Black Knight includes second lien mortgages and home equity lines of credit in its cash-out refinance numbers.
"The fact that homeowners pulled out more equity in the third quarter than ever in the last 14 years makes perfect sense, given that interest rates are still historically low and there have been astronomical increases in home prices in recent years," said Andy Walden, Black Knight's vice president of market research, in an email.
Cash out activity has skyrocketed this year, driven by interest in topping up to better enable remote working, home improvement or consolidate debt accumulated during the pandemic, said Adam Mercado, director of operations at Clearpath Lending.
"The ability to really create a home office or host friends and family outside of the holidays has become more and more of a trend with ordering at home not too far away," he said. "Many others have struggled to amass thousands of dollars in credit card / revolving debt over the past year to keep up with monthly spending."
Refinancing rates for withdrawals, which can be in the 3% range, often look attractive compared to credit card debt, which can be as high as 16% or more, he noted.
While the dollar payout volume in the third quarter was at the level of the housing bubble in the mid-1980s, the market looks very different now. The volume of vulnerable equity was much larger in the third quarter of this year than it was in the second quarter of 2007, Black Knight noted. While the refinance numbers on disbursements were similar at the time at $ 72.5 billion, the available equity just before the property crash was just $ 3.8 trillion, leaving consumers less drawn to their available resources.
"Data points like these inevitably and understandably lead to comparisons with the time before the Great Recession," said Ben Graboske, president of Black Knight Data & Analytics, in a press release. “It is therefore particularly important to note that the $ 70 billion that was withdrawn from the market via cash-out refis in the third quarter of 2021 represented only 0.8% of the available, tangible equity at the beginning of the quarter. "
However, it is clear that the amount of usable equity is no longer increasing as quickly as it was before.
Home appreciation rates have slowed, and affordability – defined as the median percentage of income required to make the monthly principal and interest payments on a 30-year mortgage – has risen above a major benchmark.
The median income needed to buy an average home, down 20%, rose to 22.4% in October, after starting at 18.1% in early 2021. It's also close to a three-year high and in a range above 20.5%, which has historically been linked to slower price growth. The last time affordability restrictions were this high was in late 2018, when the average mortgage rate was 5%.
"The rate at which available equity has grown has slowed from recent quarters – as has the rate of home price growth that caused it – mainly due to the impact of rising interest rates and tightening affordability," said Walden.