U.S. home equity is back
So why aren’t more people borrowing?
WASHINGTON — Alicia Johnson and her husband wanted to renovate their home last fall but ran into a roadblock: When they tried to refinance their mortgage and borrow against their equity, five banks said no.
Problem was, the Johnsons’ mortgage covered their home in Christiansburg, Va., and some adjacent land — a deal-breaker.
“They all pointed to the same thing: The rules have changed,” she said. The banks refused to lend against both the home and the land.
Their frustration reflects a major factor slowing a still-sluggish U.S. economy: The inability of many to tap their home equity.
Americans have long borrowed against the ownership stakes in their homes to buy cars, build decks and renovate houses. That borrowing helped accelerate consumer spending, the U.S. economy’s primary fuel — until the housing bust struck a decade ago and shrank home prices.
But prices have recovered, and housing equity now equals 58 percent of home
values — the highest point since 2006. Yet borrowing against that equity has barely budged from post-recession lows, which helps explain why consumer spending remains weak eight years after the Great Recession ended.
On Friday, the government is expected to estimate that the economy grew at an annual rate below 1 percent in the January-March quarter, thanks in large part to anemic spending.
The main problem, according to consumer surveys and banking analysts, is that despite low interest rates, it has become harder to borrow. The web of lending regulations that was tightened after the financial crisis has yet to be eased. Many households would like to borrow more through home equity credit lines or cashouts from loan refinancings. But having been burned by defaults during the financial crisis, banks are demanding nearly pristine credit.
“It’s harder to do a cashout refinancing or get a home equity line of credit than it used to be,” said Karen Dynan, who was a chief economist at the Treasury Department in the Obama administration. “That has dampened the housing wealth effect” — the tendency of households to spend more when home values rise.
Johnson, 54, had hoped to spend $30,000 on the renovation. It would have meant building a music studio and adding wheelchair ramps and other modifications for her husband, a disabled veteran. That project is now on hold.
Americans do carry slightly more overall debt than before the recession, according to data from the Federal Reserve Bank of New York. But that’s mainly because of huge increases in student loans. By contrast, the kind of debt that fuels consumption — credit card borrowing as well as housing debt — remains well-below pre-recession peaks.
Research from the New York Fed suggests that if home-equity-related borrowing were to regain healthier levels — dating to the early 2000s, before the housing bubble — the economy could accelerate by three-quarters of a percentage point a year.
Stricter lending rules aren’t the only factor restraining borrowing. Younger and less affluent Americans are less likely than before the recession to own a home, for example, or to have much equity to borrow against if they do own. These are people who historically have been most inclined to borrow and spend.
Older, wealthier homeowners now own a larger share of America’s housing wealth. Yet at their age, they’re less likely to borrow for big purchases or projects.
Partly as a result, Americans have increased spending an average of just 2.3 percent a year since 2009, when the recession ended, just two-thirds of the historical norm. Because consumer spending drives about 70 percent of the economy, that weaker pace has hobbled growth.