Homeowner equity grew 7 percent by more than $380 billion in the first quarter of 2018, according to the latest Mortgage Monitor report released by Black Knight on Monday. In fact, this is the largest single quarter growth since Black Knight began tracking this data in 2005. Yet, homeowners with mortgages withdrew only $63 billion in equity via cash-outs or home equity lines of credit (HELOCs) representing a 7 percent decline from the last quarter of 2017, Black Knight said.
Despite a 16 percent increase in equity over a one-year period, just 1.17 percent of the total equity available was withdrawn over the quarter, representing the lowest share in four years. "Collectively, American homeowners now have $5.8 trillion in equity available, yet only 1.17 percent of that total was withdrawn in the first quarter of the year," said Ben Graboske, EVP of Black Knight's Data and Analytics division. "Somewhat surprisingly, even though rising first-lien interest rates normally produce an increase in HELOC lending, the volume of equity withdrawn via lines of credit dropped to a two-year low as well."
According to the report, cash-out made up 70 percent of all refinance transactions in Q1, with 45 percent of homeowners who took a cash-out refi having to increase their rate to do so. Cash-out refi withdrawals were also up 5 percent from last year compared to HELOC withdrawals, which slipped 1 percent during the period. The report concluded that these numbers pointed out to the fact that as short-term rates rose, traditionally good potential HELOC borrowers were turning to cash-out refis due to their competitive rate advantage.
So what's driving the decline of HELOCs? "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 more closely tied to the federal funds rate," Graboske said. "As of late last year, the difference between a HELOC rate and a first-lien rate had widened to 1.5 percent, the widest spread we’ve seen since we began comparing the two rates 10 years ago. The distance between the two has closed somewhat in Q2 as 30-year mortgage rates have been on the rise, which does suggest the market remains ripe for relatively low-risk HELOC lending expansion."
The Federal Reserve raised its target interest rate again at its June meeting, and according to Graboske that would also increase the standard "interest rate on HELOCs in Q3 2018."