September 26, 2016
Dipping Into Home Equity
TheStreet.com quoted me in Americans Are Increasingly Dipping Into Home Equity. It opens,
Is there a flipside to rising home values across the nation?
Take California, where stronger home value figures “are giving many homeowners a reason to tap into their equity and spend money,” according to the California Credit Union League.
The CCUL states that approximately 5.2 million homes with mortgages across 11 different metropolitan statistical areas in the Golden State “had at least 20% equity as of June 2016,” citing data from RealtyTrac. Meanwhile, home equity loan originations rise by 15% over the same time period, to $2 billion. “Altogether, HELOCs and home equity loans (second-mortgages) outstanding increased 5% to more than $10 billion (up from a low of $9.2 billion in 2013 but down from $14.2 billion in 2008),” the CCUL reports.
The organization doesn’t see all that home equity lending and spending as a bad thing.
“The local surge in home-equity lending and cash-out refinancings reflects a strong national trend in homeowners increasingly remodeling their homes and enhancing their properties,” said Dwight Johnston, chief economist for the California Credit Union League.
Financial experts generally agree with that assessment, noting that American homeowners went years without making much-needed upgrades on their properties and are using home equity to spruce up their homes.
“Homeowners are cashing in on home equity again because they can,” says Crystal Stranger, founder and tax operations director at 1st Tax, in Wilmington, Del. Stranger says that for many years, home values have decreased or only increased very minor amounts, but now home values have finally increased to a significant enough level where there is equity enough to borrow. “This isn’t necessarily a bad thing though,” she says. “With the stagnant real estate market over the last decade, many homes built during the boom were poorly constructed and have deferred maintenance and upgrades that will need to be made before they could be re-sold. Using the equity in
a home to spruce up to get the maximum sale price is a smart investment.”
U.S. homeowners have apparently learned a harsh lesson from the Great Recession and the slow-growth years that followed, others say.
“Before the financial crisis, many used home equity as a piggy bank for such lifestyle expenditures,” says David Reiss, Professor of Law at Brooklyn Law School, in Brooklyn, N.Y. “Many who did came to regret it after house values plummeted.” Since the financial crisis, homeowners with home equity have been more cautious about spending it, Reiss adds, and lenders have been more conservative about lending on it. “Now, with the financial crisis and the foreclosure crisis receding into the past, both homeowners and lenders are letting up a little,” he says. “Credit is becoming more available and people are taking advantage of it.”
“Nonetheless, good financial advice is timeless, and that hard-earned home equity should be protected from casual expenditures,” Reiss notes. “Your future self will thank you for it, no doubt.”
Other financial industry insiders agree and warn homeowners who take out home equity loans that there is great risk attached to using the money in non-essential ways.| Permalink