Why HELOCs Aren't What They Used to Be: A Look into Their Falling Popularity

Homeowners have experienced a significant increase in home equity over the past decade. For instance, the U.S. aggregate of home equity skyrocketed from $8 trillion in 2012 to $32 trillion in 2023. This surge is primarily attributed to the global house price boom over the past decades, accompanied by low mortgage interest rates until recently.

Mortgage Rates

Source: Federal Reserve Economic Data. 30-Year Fixed Rate Mortgage Average in the United States, Weekly, Not Seasonally Adjusted

However, this amassed home equity can be seen as a large stockpile of 'dead capital' unless homeowners find a way to use this equity capital. In his seminal book The Mystery of Capital, Hernando de Soto argues that most emerging markets suffer from this exact issue. He contends that all of this comes from a lack of legally enforceable transactions on property rights. The U.S. and most other developed countries do have these institutions, which begs the question, do homeowners in these markets make use of this amassed capital?

Home Equity Lines of Credit (HELOCs) have traditionally offered homeowners a productive way to utilize their home equity. These financial products allow homeowners to borrow against their home equity by using their home as collateral. As a collateralized line of credit, it provides homeowners with the option to pay off debts, make home improvements, and finance a (new) enterprise at a relatively low rate. Despite these potential benefits, it's interesting to note that while household home equity has increased, the outstanding amount of revolving home equity loans has been on a steady decline.

Home Equity Loans

Source: Federal Reserve Economic Data. Revolving Home Equity Loans, All Commercial Banks, Billions of U.S. Dollars, Weekly, Seasonally Adjuste

I pose two reasons for this development. First, lenders have become more cautious after the global financial crisis, leading to increased regulations and scrutiny from supervision authorities, making HELOCs more difficult to obtain. This shift in the financial landscape has made it crucial for homeowners to stay informed and adapt their financial strategies. Second, as interest rates have decreased so much over the past decade, most homeowners might have found it more attractive to do a cash-out refinancing. With the latter, a new mortgage is taken out for more than the homeowner's previous mortgage balance, and the difference is paid to the homeowner in cash.

In short, homeowners are utilizing their amassed home equity capital. While HELOCs are still an interesting financial product for homeowners to use their home equity, the low-interest rates have made other alternatives more attractive. However, with the increasing interest rates of the past years, they might become attractive again for homeowners.