While rising home prices and mortgage rates have led to a sharp decline in refinancing activity this year, analysts expect an upswing in the number of home equity loans.
A recent report from Lender Processing Services (LPS), a mortgage data provider, suggests that higher interest rates and prices will contribute to "a new appetite" for home equity loans among U.S. homeowners.
That's mainly because as home values rise, more homeowners find themselves with greater equity than they did a year or so ago.
For those who want to tap equity without refinancing their entire mortgages at current rates — which are up nearly a point since May — a home equity line of credit, or HELOC, can make sense.
"It's safe to say that the opportunity is there," said LPS Senior Vice President Herb Blecher. "As home prices go up and borrowers get more equity in their homes, they might be incented to get more cash out and borrow against that equity.
It's already happening. Data compiled by industry website Inside Mortgage Finance show that home equity loan originations in the U.S. hit $14 billion in the second quarter. It was up from $12 billion a year earlier and $11 billion the prior quarter and marked the highest quarter since 2009, says Guy Cecala, publisher of Inside Mortgage Finance.
Most of the loans are HELOCs, not fixed-rate second mortgages. Cecala's data show home equity loan originations apt to reach from $51 billion to $52 billion this year, making it the busiest since 2009.
That number still pales against pre-crisis times. As recently as 2006, there were $430 billion in home equity originations, he says.
"That gives you an idea of how far it's fallen," Cecala said. "Yes, we are seeing a rise in home equity lending this year. But it's up from near-record lows.
Even so, he says, the HELOC market is the best in three or four years, thanks mainly to rising home prices. Through July, home prices in 20 U.S. cities were up 12.4% year over year in the S&P/Case-Shiller index. It was the biggest annual gain since February 2006.
The average rate on a 30-year fixed-rate loan is 4.13%, in the latest gauge from Freddie Mac (FMCC). That's down from weekly averages as high as 4.57% in September, thanks to the Federal Reserve maintaining a bond buying program that aims to keep rates low. But rates are well above the 3.35% seen in May.
Data from Bankrate.com put the average rate on a $50,000 FICO-based HELOC at 4.40%.
The jury is still out on how rising rates will affect homebuying, but they've already had a notable effect on refinancing. Refi applications are down around 60% since rates began rising in May, according to the Mortgage Bankers Association.
"The main effect of rising rates is that fewer people are refinancing," said Jed Kolko, chief economist at the real estate website Trulia (TRLA). "It's a purely financial decision that people can make more quickly. When rates go up, refinancing goes down.
Many homeowners who bought during the housing boom of 2005 and 2006 have already refinanced their first mortgages, Blecher of LPS says. Many who bought after the housing market crashed wouldn't want to refinance, having gotten a lower rate in the first place.
"If I have a 4% first lien, I don't have an incentive to refinance right now," Blecher said. "But if I want to take advantage of a home price increase, the home equity opportunity is there.
It's particularly true of homeowners who bought during the housing slump of 2009 through 2012, when home prices in most U.S. markets plunged. Many have seen a gain in equity this year.
Also, more formerly underwater homes are back in positive territory. CoreLogic (CLGX), a property data provider, says 2.5 million homes returned to positive equity in the second quarter . Of U.S. homes with a mortgage, the share with negative equity fell to 14.5% in the second quarter from 19.7% in the first.
Though some of those homeowners might be tempted to take out home equity loans to finance home improvements or simply get cash, it will take a long time for the HELOC market to really resurge.
"It can't go back to the peak levels anytime soon because there's still not enough home equity in the market," Cecala said. "And unless there's a huge change in the underwriting standards — which continue to be very strict right now — there are also a lot fewer people who can qualify for home equity loans as opposed to 2006."