Home Equity Loans Make Comeback Fueling U.S. Spending
Home equity lines of credit that fueled a spending spree during the U.S. property boom are back.
After six years of declines, lending for so-called HELOCs will rise 30% to $79.6 billion in 2012, the highest level since the start of the financial crisis in 2008, according to the economics research unit of Moody’s Corp. Originations next year will jump another 31% to $104 billion, it projected.
Lending tied to real estate is reviving as record-low mortgage rates spur the housing recovery while an improving job market makes it easier for people to borrow. A rise in home equity lines is in turn helping the economy, fueling purchase of goods like televisions and refrigerators. Consumer spending, the biggest part of the economy, accelerated to a 2% annual rate last quarter from a 1.5% pace in the prior period.
“If house prices continue to rise, home equity lending will keep rising,” said Mustafa Akcay, a Moody’s Analytics economist in West Chester, Pa. “Lenders have been worried about the ability of consumers to pay back their loans, and as the economy improves, that concern is easing.”
The median U.S. home price will probably gain 8% this year, the fastest pace of growth since 2005, according to the Mortgage Bankers Association in Washington. The amount of equity homeowners had in the second quarter rose by $406 billion to $7.3 trillion, the highest level since 2007.
“People will spend more of their equity,” said Chris Christopher, an economist at IHS Global Insight in Lexington, Mass. “It won’t be as much as they spent when prices were gaining at a rapid pace in 2005 and 2006, but it should have a positive impact on consumer spending.”
The revival in HELOCs comes as lenders including Bank of America Corp., Wells Fargo & Co. and Citigroup Inc. are still coming to grips with bad loans made during the housing boom that ended in 2006. Pressed by regulators earlier this year, banks are writing off vintage HELOCs wiped out by a housing retreat that stripped about a third of home values in four years. Banks charged off—or declared worthless—$4.5 billion of equity loans in the third quarter, the most in two years, according to Federal Reserve data.
Americans had used their homes like credit cards to go on spending sprees during the 2000 to mid-2006 real estate boom, tapping their equity to buy cars, televisions and luxury cruises. Consumers used about $677.3 billion, or about $113 billion a year, from home equity loans for consumer spending, according to a 2007 paper by former Federal Reserve chairman Alan Greenspan and Fed economist James Kennedy.
HELOCs are adjustable-rate mortgages tied to prime rates, the interest charged by banks to their most creditworthy customers, with the addition of a margin predetermined by the lender. The national average prime rate has been 3.25% since the end of 2008, as measured by Bloomberg. Typically, banks add 2 to 4 percentage points onto that.
The economy probably will grow at a 2.2% pace in 2012, the third year after the end of the recession, according to the median forecast of 80 economists surveyed by Bloomberg. Unemployment probably will average 8.1%, down from 9% last year, according to the economists’ average estimate.
The biggest use of HELOCs is to pay for home renovations and repairs, at 54%, according to data released last month by the Commerce Department. Renovation spending this year probably will rise to $120.7 billion from $114 billion in 2011, according to Harvard University’s Joint Center for Housing Studies in Cambridge, Mass.