For example, you can refinance a $300,000 loan with a $350,000 loan, leaving with $50,000 in cash less closing costs.
The amount of money Americans take out of equity is significant.
In the second quarter of 2017 alone, the total dollar volume of stock cashed domestically was $15 billion, up $1.2 billion from the first quarter of 2017, according to the latest. Freddie Mac’s Quarterly Refinance Statistics Report.
The Washington region is no exception to this trend.
In 2016, 34% of refinance loans in our region involved taking equity out, up from 16% in 2013. Freddie Mac publishes percentage statistics annually, so 2017 numbers are not yet available.
These numbers are a far cry from the peak of 2006, when cash refinance in our area accounted for 92% of all refinance mortgages.
But the current trend is nonetheless worrying.
According to the American Enterprise Institute’s International Center on Housing Risk, the National Mortgage Refinance Risk Index (NMRI) for July 2017 rebounded to the same elevated risk level seen during the crash, primarily due to a leap from cash refinancing.
The NMRI determines the likelihood that a borrower issuing a loan today would default, if we were in the same economic conditions as during the crash.
“We were at 6.8% risk in 2012 when we started measuring rollover risk levels,” said Edward Pinto, co-director of the Washington-based International Center for Real Estate Risk. “Today, that risk level has doubled to 13.6%, and FHA withdrawal loans are at a 26% risk level. A risk level of 12% is considered extremely high.
Pinto, who is very concerned about the recent increase in cash refinance loans, says he thinks a severe market correction is inevitable.
“We don’t know when the market will crash next, but we’re definitely on the upswing,” Pinto said.
Len Kiefer, deputy chief economist at Freddie Mac, is less concerned about the current cash rollover rate.
“If you look at the amount of withdrawals in dollars, adjusted for inflation, it’s pretty low where we are today,” Kiefer said. Dollar disbursements reached nearly $90 billion in 2006.
According to Kiefer, Freddie Mac has been tracking cash refinancing since the 1990s. It’s instructive to look at historical trends to understand how homeowners have fared over the long term.
“The current upward trend is a return to normal. As I see it today, that doesn’t strike me as particularly alarming,” Kiefer said.
How can homeowners get so much money out of their homes?
Attribute it to rising home values and high appraisals.
According to the Federal Housing Finance Agency’s Housing Finance Index, home prices rose an average of 6.6% nationally between the second quarter of 2016 and the second quarter of 2017. A recent report on the outlook published by Freddie Mac claims that price growth in many markets has exceeded 10% on an annual basis since the stock market crash of 2008. This is the result of limited supply and robust demand, the report says .
Rising house prices are good for homeowners, right?
Not necessarily, according to Pinto.
“Homeowners with low-cost properties and first-time home buyers are the most affected,” Pinto said. “Inexpensive properties have increased in value by 11% year over year.”
As real estate prices rise, the number of equity owners believe they have increases, Pinto said.
“Additionally, homes are appraised at higher prices for refinancing, without an actual home sale taking place. So the increased value is only on paper and not based on reality,” Pinto said.
Pinto warned that this is not sustainable and there is no end in sight.
So what do the owners do with this money?
“Home renovations have become an exit motivator,” Eric Strasser, mortgage consultant at SunTrust Mortgage in Rockville, said in an email. “People realize that in a tight buying market, they can often upgrade or customize their current home rather than selling to buy a new home.”
In recent years, homeowners with sufficient equity in their properties have refinanced to take advantage of low interest rates. For some, it was a good financial move, helping to lower monthly mortgage payments or consolidate debt, Strasser said.
There are other reasons why Americans are taking equity out of their homes.
Many aging Americans who own homes choose to age in place. Some take equity out of their homes to renovate them, making their homes more secure and usable for their future needs.
Other homeowners are paying off or consolidating credit card debt and student loans.
Despite his optimism, Freddie Mac’s Kiefer agreed that homeowners should be disciplined — that we shouldn’t view increasing our home equity as a financial boon.
But not all Americans are disciplined with their money.
According to WalletHub’s 2017 Credit Card Debt Study, credit card debt is trending toward pre-recession patterns. ” From [the second quarter of 2017]outstanding credit card debt is at the second highest level since late 2008, and we are on a collision course with the $1 trillion mark.
Some Americans withdraw equity from their homes to pay off their credit cards, only to accumulate balances on their credit cards again.
“It’s not a virtuous process,” Pinto said.
Jill Chodorov Kaminski, associate broker at Long & Foster in Bethesda and licensed realtor at CORE in New York, writes an occasional column on local market trends and housing issues. Jill can be reached at [email protected]
Correction: A previous version of this article misspelled Len Kiefer’s last name in one instance.