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REAL ESTATE

Homeowners are banking off rising home prices - here’s how

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Home equity is the difference between the value of a home and the amount still owed on it.

If the value of a home stays flat, home equity rises slowly -- one mortgage payment at a time. But if the value of a home rises quickly, the amount of equity jumps along with it.

That exact scenario is playing out all over the country, with rising home prices pushing US home equity to a record high of $23.6 trillion in Q2 -- leading homeowners to cash out their equity at record levels as well.

Per Bloomberg, US homeowners logged 1.1 million+ cash-out refinances* in Q2, and are using their newfound cash to pay for renovations, invest in stocks, and probably buy NFTs (non-fungible tokens).

So how’d the market get so frothy?

It all started in March 2020

When the pandemic struck, the federal government took several steps to stabilize the economy, including embarking on a massive bond-buying program.

The program sent mortgage rates downward, kicking off a virtuous cycle:

  1. Lower mortgage rates opened the doors to more buyers
  2. More buyers led to bidding wars and higher purchasing prices
  3. Investment firms (e.g., BlackRock) and iBuyers (e.g., Zillow, Opendoor) snatched up inventory, pushing prices even higher
  4. Higher prices drove up valuations for surrounding homes

As a result, home prices jumped by 11% in 2020, then 17% in 2021.

But the cycle could be ending soon

The Federal Reserve plans to wind down its monthly bond purchases before ending them in mid-2022. The move would likely push mortgage rates higher, putting a damper on the current cycle.

However, some analysts believe the housing market will stay hot -- claiming a shortage of inventory with sustained demand could keep current prices intact.

Even if prices do fall a bit, it could bring sidelined buyers back into the mix, pushing prices up again and kicking off a new cycle of refinancing.

GLOSSARY

*Cash-out refinancing: A type of mortgage refinancing option where homeowners get to pocket cash in exchange for taking on a larger mortgage.

For more articles from The Hustle, go here.

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