Home Equity Borrowing ‘Poised to Soar;’ Remodeling Forecast Softens

TransUnion, Chicago, said growth in home equity could lead to a surge in home equity lending over the next year. However, the Joint Center for Housing Studies at Harvard University said home improvement and repair spending is expected to soften in 2019.

The TransUnion study, released at the recent Mortgage Bankers Association Annual Convention & Expo, found several dynamics are creating a market ripe for home equity origination growth, but a better understanding of how consumers use these loans may impact their interest in securing one.

The study said a major reason for expected growth in home equity borrowing is that household home equity, currently nearing $15 trillion, has surpassed its prior peak in Q1 2006 by more than $1 trillion. Home equity levels have been rising at a rapid rate each year since hovering by $6 trillion between 2009 and 2011. While home prices increased by 42% between Q1 2011 and Q1 2018, home equity levels outpaced home prices in that same timeframe.

“There are ample signs that the home equity lending market is poised for growth,” said Joe Mellman, senior vice president and mortgage business leader with TransUnion. “Home prices have surpassed 2005 boom levels and household home equity has grown even faster. Increasing consumer debt makes debt consolidation an appealing option and home equity can be the most economically attractive path to do just that. The recession caused a home equity lending pull-back, which all but eliminated consumer marketing and education.”

The report said new market dynamics may begin to accelerate the home equity loan market. HELOCs represented the greatest number of home equity originations in 2017 at 1.2 million, showing a 2.3% year-over-year growth from 2016. This presents a market opportunity for lenders as HELOCs have extremely low vintage default rates and an estimated 70 million homeowners likely qualify for a home equity product.

“With rising interest rates and increases in home prices outpacing wage growth, homeowners are more likely to stay in their current homes, rather than ‘move up.’ This leads to a higher likelihood of improving their existing home and home equity can be great tool for that,” added Mellman.

However, the Harvard Joint Center study said after several years of solid acceleration, annual growth in national home improvement and repair spending is expected to soften in 2019. The Center’s Leading Indicator of Remodeling Activity projects year-over-year increases in residential remodeling expenditures to reach a decade high of 7.7 percent this year, then start to drift downward to 6.6 percent through third quarter 2019.

“Rising mortgage interest rates and flat home sales activity around much of the country are expected to pinch otherwise very strong growth in homeowner remodeling spending moving forward,” said Chris Herbert, Managing Director of the Joint Center for Housing Studies. “Low for-sale inventories are presenting a headwind because home sales tend to spur investments in remodeling and repair both before a sale and in the years following.”

Even so, said Abbe Will, Associate Project Director in the Remodeling Futures Program at the Joint Center, many other remodeling market indicators including home prices, permit activity and retail sales of building materials continue to strengthen and will support above-average gains in spending next year. “Through the third quarter of 2019, annual expenditures for residential improvements and repairs by homeowners is still expected to grow to over $350 billion nationally,” she said.