Fewer Home Equity Loans

It should be no surprise that fewer people are taking out home equity loans. After all, how many home equity lines of credit can you have on a home? Currently in the Capital Region, one out of every four homeowners has a second mortgage. According to DataQuick Information System, area homeowners have extracted $22 billion from their home’s equity and converted it to cash over the past year. Most of that new cash has been spent on a variety of goods and services, which has been a substantial boast to the local merchants.

Rising interest rates and slower (if any) home appreciation is giving pause to the home equity lending industry. Borrowing by area residents has dropped 10 percent from January as interest rates have risen to 8 percent or higher on the popular equity loans.

When area homeowners are borrowing less they will spend less. How will that affect the local economy? Christopher Thornberg, senior economist of UCLA’s Anderson Forecast (and always an outspoken pessimist) said in an interview, “Keep an eye out. It’s going to get worse.” The growth in employment, decline in unemployment and increase in tax revenue in our region doesn’t support Chris’s opinion. Will the current employment gains offset the loss of consumer spending that has been driven by debt? Probably.

While the number of home equity loans is declining, thousands are still tapping their home’s equity. Between January and April 27,000 homeowners in the eight-county area borrowed $2.5 billion against their home’s value. The total numbers will continue to decline but for many a home equity loan despite the higher interest rates have a number of benefits. A home equity loan carries a lower interest rate than a credit card and the interest on equity loans is tax deductible.

Enjoy your weekend. I think I will go someplace cool like the Artic. Maybe preview some homes in Alaska. What are you doing to stay cool? Drop me a note so I can share with our readers.