Markets & Economy

The return of the home as ATM

Increase in HELOCs, lower lending standards are warning signs of another housing bubble

Borrowers Tap Their Homes at a Hot Clip” blurted a recent Wall Street Journal headline.

It was bound to happen with rising home prices.

Didn’t get a raise? Working two jobs to make ends meet and need cash? If you own a home, you may be in luck. That same old home that you bought years ago is worth more today than it was last year. Your house hasn’t become more productive and most likely has depreciated, but it’s worth more and that means you can margin your used home to cash in.

Homeowners, sellers are optimistic

The constant barrage of media reports of a housing “recovery” have sunk in. Home sellers are as optimistic as they have been on the upward trajectory of home prices since 2007 — just before the big plunge.

Homeowners are seemingly oblivious to a declining homeownership rate, a shrinking workforce that leaves fewer potential homebuyers, declining existing-home sales, declining new-home sales, declining pending home sales and declining mortgage applications. Many homeowners are eager to reap the rewards of the housing “recovery” by selling or tapping the equity in their homes.

Return of home equity lines of credit (HELOCs) and lower lending standards

Policies designed to boost home prices are destined to fail as home prices need to find a market price that people can afford."

Return of HELOCs

HELOCs peaked in 2006 at nearly $500 billion, then dropped to less than $100 billion in 2010 and 2011. While home equity lending is still far below its peak during the housing boom, it’s ramping up. HELOCs rose 8 percent in the first quarter this year.

Return of lower lending standards

Rising home prices spurred on by artificially low interest rates have led to a rebound in HELOCs, but low home sales have Washington worried. To stimulate home sales, Fannie Mae and Freddie Mac are planning on relaxing lending standards.

With year-over-year double digit percentage home price increases, an increase in HELOCs and lower lending standards on the way, all the elements are in place for another housing bubble.

But this time it IS different

This time it is different. The housing mania is not widespread. While home prices are bubbly, home sale volume is flat or declining. Between 30-50 percent of the homes sold in the past few years have been purchased by investors for cash. Some of those investors are large public companies like Blackstone. Unlike the housing bubble of the mid-2000s, this is Wall Street’s bubble, not Main Street’s.

In the mid-2000s, prices were too high, but there was no shortage of buyers. Existing-home sales were about 7 million in 2005, and about 1.5 million new homes were sold that year. In 2013, existing-home sales dropped to about 4.5 million and new-home sales plummeted to about 400,000. First-time homebuyers represented about just 27 percent of the existing homes sold in 2013.



*The current U.S. population is approximately 317 million. The U.S. population was approximately 226 million in 1980 and 203 million in 1970.

In the mid-2000s, a greater percentage of people were attached to the labor force, and obtaining a mortgage was relatively easy. Today, there are fewer potential homebuyers, and obtaining a mortgage is no easy task.