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Surging Home Equity and Raising Interest Rates

June 19, 2018

If you think that the current real estate market is undergoing some remarkable changes, you are not the only one. On Wednesday last week, the Federal Reserve Bank raised interest rates by a quarter of a point and communicated that two additional increases are to be expected in the near future. Also, based on a report released by Attom Data about two weeks ago, home equity lines are making a come-back, signaling that homeowners are actively seeking ways to tap their home equity even with recent tax law changes eliminating the deductibility in most cases. What does this scenario mean for homebuyers and homeowners? Let’s address this question, one category at a time, starting with homebuyers.

 

Renting or buying a home has always been a dilemma for young individuals or couples looking to start a new chapter in their life. Despite Millennials’ commitment and desire to purchase a home, homeownership has become increasingly difficult for first-time buyers; the challenge is particularly heightened in densely populated metropolitan areas, where home prices have dramatically outpaced wage growth, making the down payment for a home unreachable for many. The recent interest rate increase, accompanied by the news of two more increases expected before this year is over, will affect mortgage accessibility. The interest rate increases by the Fed will most likely leave many home buyers feeling discouraged.  They realize that in this heated market, they don’t have enough resources for the house they want, and with little to put down, they may be strained by the rhythm of a monthly mortgage payment, which is indeed too high for them.

 

There are challenges for current homeowners too. On the one hand, increasing home prices may benefit home owners who see their home equity stake grow accordingly; the longer they stay in the home, the more equity they will likely accumulate. On the other hand, it also true that moving up to their next home is a step that may be quite delayed, making home owners stay in their current home longer, further restricting the market of listed homes for sale. Additionally, with increased equity available in the home, home owners are more prone to look for ways to access that wealth, which is at the moment immobilized. To quantify the current value of home equity available in the U.S., the Federal Reserve estimated earlier this month that it hit almost $15 trillion in the first quarter of 2018. In order to access this wealth, home owners are exploring different options and they are not all debt-based.

 

Indeed, both MarketWatch and Attom Data confirmed that the equity-sharing and co-buying trend has taken off. It emerged that co-buying in San Francisco, CA was adopted in about 33% of sales in 2017 and it is up to 38% this year. Similarly, it accounted for 26% of sales in Seattle, WA last year, and it has gone up to 28% so far, in 2018. Our equity sharing product is designed to help home owners access equity with increased flexibility without the use of debt, as well as allow home buyers to purchase their ideal home without feeling trapped by their mortgage. Our equity sharing product is currently available for selected home owners and will be extended to  more consumers later this year, through our network of mortgage originators and financial planners. Thanks for reading! We hope to see you next week.

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Author of the Post

Laura is a member of the EquiFi leadership team.

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