Thursday, February 16, 2017

Houses Are No Longer ATMs (But They Should Be)

Housing equity is the primary form of collateral that households use for borrowing. Prior to the 2008 financial crisis it was used a lot by borrowers. Not anymore.

The blue line in the chart below (via the New York Fed)  shows total owner’s equity in real estate. The red line shows the combination of two ways that households can withdraw equity—assuming they have some—without selling the house: they can originate a junior lien against the property or they can refinance using a cash-out refinancing of an existing first-lien mortgage.

The New York Fed comments:
The first observation that’s striking about the chart is the dramatic change in borrower behavior with respect to home equity. During the boom between 2000 and 2006, household equity and its extraction were both rising rapidly. From 2003 to 2007, homeowners were extracting more than $350 billion per year, resources that were available for use in a variety of purposes from home improvement to consumption.

The second major point of the chart is the effect of the housing and financial crises. Beginning in 2008, equity extraction began to decline quickly and was hovering around zero by 2010, where it remained through 2012. The virtual elimination of equity withdrawal was a big contributor to the household deleveraging that ultimately shaved more than $1.5 trillion from household debt...

A third notable feature of the chart is that the current house-price rally (prices are now up about 40 percent from their 2012 trough, according to CoreLogic) has not been accompanied by anything like the same level of equity withdrawal as the previous boom. In fact, withdrawal has remained well south of $50 billion, even as aggregate equity has approached its 2005 peak.
Generally, I am not in favor of borrowing against equity in a house. However, if you can borrow long-term at a fixed rate with no pre-payment penalty, now is a great time. Especially if you are in a situation where you income will go up with price inflation.

Price inflation, over time, will make your payments insignificant. It often (not always) makes sense to go against the crowd, now is such a time. Most aren't doing it but now is a great time to use your house as an ATM.



  1. Thanks, Bob, for sharing. Invested smartly, borrowing against one's house is a great move with the potential for massive gains.

    For example, in 2003, resource investor Marin Katusa (formerly a Calculus teacher) took out a $180,000 loan against his home's equity, and recognizing the surging demand for tungsten from both China and the U.S. military - and the resulting supply/demand cruch - he invested in tungsten stocks. Over the next two years, he turned $180,000 into $1 million.

    I'm not advocating that individuals invest in tungsten. But, understanding the risks in investing, especially in resource investing, there are opportunities now over the next few years as we face inflation that the Keynesians won't see coming.

    1. Even better is that if tungsten had gone south, your friend could have defaulted on his mortgage and walked away. Perhaps not entirely "fair" but since the banks do that to us all the time, I say good for the gander