Household Equity Rising

“The ache for home lives in all of us, the safe place where we can go as we are and not be questioned.”   ~ Maya Angelou

Following the debacle of the housing crisis from over ten years ago, homeowners have become less impulsive and more conservative. As a result, home equity levels have surpassed mortgage debt levels in homes across the country. The latest data from the Federal Reserve shows that household equity is now approaching $16 trillion, exceeding the level of mortgage debt standing at $15.1 trillion at the end of 2018.

Contributing factors to the rise in home equity are climbing real estate values, a sustained low rate environment, limited housing supply, and an improving economic environment. Americans are also staying in their homes longer which helps build equity faster as opposed to moving and taking out a new loan laden with fees and interest payments.

While mortgage rates have remained relatively low, thirty-year mortgage rates have ticked up in recent months to their highest levels in several years. Optimism about economic growth has led to higher inflationary expectations, which eventually translate into higher interest rates and mortgage rates. As a gauge for mortgage rates nationally, the increase in the 10-year Treasury has led to an overall increase in mortgage rates. The average annual 30-year conforming rate in 2018 was 4.54%, the highest average rate since April 2010, according to data from Freddie Mac. The average 15-year conforming mortgage rate climbed to 4.0% over the same period of time. Of course, the concern is that as mortgage rates continue to increase, home sales and affordability may begin to falter.

But, a tight job market and rising wages may help alleviate the rise in mortgage rates, as a strong labor market and higher payrolls help maintain demand for homes. Additionally, the Fed recently announced that it would refrain from its previous strategy of increasing short-term rates as well as hold off on shrinking its balance sheet. Both monetary tactics are expected to keep interest rates at current levels, without any additional increases just yet.

Source: J.P. Morgan

It is important to note that the amount of mortgage debt held by homeowners has not yet returned to the levels seen since before the housing crisis. Simply put, homeowners are more cautious

because of what happened during the crisis. Recall that from 2000 to 2005, housing prices in some metro areas of the country rapidly rose. Homes with prices that for decades had steadily grown with inflation were suddenly worth double the amount.

The rapidly rising prices fueled extraordinary behavior. For many homeowners, rising values made it attractive to refinance their mortgages and use their home equity to pay for other things such as investment properties, home remodels, or cars.

Contrast that behavior with today. The Fed notes that homeowners are taking much less equity out of their homes. Household debt service has dropped significantly since the housing bust peak. Again, leftover fear from the crisis may be causing homeowners to not treat their home equity as an ATM, if you will.  And, there are more cash buys prevailing throughout the market as well, helping to somewhat reduce the reliance on mortgage loans.

As a result, homeowners are sitting on some serious cash. An estimated 44 million homeowners now have equity they can leverage. And that number appears poised to rise. Awash in record amounts of equity buoying household net worth, millions of homeowners must be asking themselves: “Should we remodel the house?  Make a down payment on a vacation home? Or, maybe just leave it for a rainy day or retirement?”

Important Note: This material is for informational purposes only and is not intended to serve as a substitute for personalized investment advice or as a recommendation or solicitation of any particular security, strategy or investment product. Madison Wealth Management does not provide tax, legal or accounting advice. © Madison Wealth Management 2019