TAPPING EQUITY: Late 90’s Market Redux?
Published On: May 9, 2024 Posted by: Jeremy Peterson
Mortgage lenders lately have been wondering how they are going to survive in a low refinance and purchase transaction environment. This creative thinking process has spawned a host of ideas. While 2/1 and 3/1 buydown programs have been promoted for purchases, other lending products are targeting existing equity. At a recent symposium, lenders gathered to learn about reverse mortgage programs, and rallied to make HELOCs and 2nd mortgages a larger portion of their loan business.
Since I have been around a while, this 2nd mortgage and HELOC talk rang a bell in my memory. Utah has been here once before, and it was in the 1990’s. As the history goes, Utah experienced a major wave of in-migration from other states like California. This movement of people set off a building boom and a surge in house prices. In fact, I have been around so long, let’s take a look at a chart I made almost 16 years ago that illustrates the point.
Here you can see that Utah house prices languished for an extended period through 1992. Then between 1992 and 1999 prices doubled. Does this sound familiar? (Looking at you 2012-2020, or 2018-2022). And just like today where prices have mellowed and come off their peaks, in 1999 house prices peaked then sagged.
What was the lending market’s answer back then? You guessed it, HELOCs, debt consolidation, and 2nd mortgages. And back then it seemed to make sense because tapping into equity and turning it into material benefits in real time seemed very attractive. After all, you can’t eat your equity. But, as homeowners kept their standards of living high by siphoning off the equity in their home, they set themselves up for a hard times. Homeowners didn’t expect prices to go down. By 2001 home prices were flat and homeowners living on equity were bumping into limits to what they could borrow. Lenders overcame this with crazy loan products like 125% 2nd mortgages. Homeowners obliged.
Then, by 2002 prices had dropped a few percentage points. Being underwater, many homeowners began to seek a way out. That need for escape brought about the short sale era of 2003-2006 as lenders took haircuts on their debt to allow homes to sell and avoid foreclosures.
So, with all this history laid out, what is in store for us now? House prices have dropped about 5% – 10% from their lofty peaks and are moderating. Meanwhile, people are realizing they have an enormous amount of equity in their homes just sitting there doing nothing. A credit card consolidation, new ATVs, that vintage 1950’s Fender guitar, and more are all looking pretty tempting with a huge amount of home equity sitting around. If lenders have their way, many of us will tap into that equity and we may find ourselves back again at the gates of a short sale market. It will take some time to get there, but it doesn’t take too many years for it to happen.
Let’s make sure our debt decisions are wise ones. In the meantime, if you are in the market to buy or sell a home, give me a call. 801-390-1480
