When you spend nearly two years minting scores of overnight millionaires, you shouldn’t be terribly surprised if you have trouble reining in consumption.
That’s one lesson the Fed is learning the hard way, amid incoming data which refuses to cooperate with efforts aimed at cooling the economy.
The value of US real estate rose by $1 trillion or more for seven consecutive quarters during the pandemic. That was due in part to an urban-to-suburban exodus and stay-at-home work dynamics, but it was facilitated by the Fed’s MBS purchases and record-low mortgage rates.
The ramifications of that for future spending should’ve been obvious, but then everything is in hindsight. As Nomura’s Charlie McElligott noted while enumerating four reasons why+ the Fed is having trouble tightening financial conditions, home equity as a percentage of GDP is now at a record high.
The New York Fed’s quarterly report on household debt and credit, released earlier this week, showed HELOCs increased by $14 billion in Q4 of 2022. It was the third straight quarterly increase, and the largest in a dozen years, although the total, at $336 billion, is subdued compared to levels seen prior to the housing bust.
Data from TransUnion, meanwhile, suggests HELOC originations skyrocketed in Q3 of last year, as available home equity rose 18% YoY to more than $20 trillion.
For comparison, that figure ($20 trillion) was 60% higher versus the same quarter five years ago. The median available equity to 86 million consumers was $244,000. More than five million Americans had at least $1 million in available equity.
The figure above is based on TransUnion’s Q4 credit insights report, which notes that originations are viewed one quarter in arrears to account for a reporting lag.
Needless to say, the above suggests that at least some of the spending impulse which is helping to keep services sector inflation elevated in the US is being financed by the pandemic property bonanza which the Fed helped stoke.
“It seems to me, now more than ever, that the FOMC should have a hard ‘come-to-Jesus’ look at their QT ops, which aren’t packing much of a punch, particularly with the MBS portion of the run-off failing to hit their max caps,” McElligott wrote Friday. “I’m telling you right now that if the Fed chose to accelerate the balance sheet run-off — or even more powerfully, were to simply float the idea of outright MBS sales — their ‘FCI problem’ would solve itself fast.”
Thanks for this post, it is eye-opening for me to see HELOCs surged when rates were rising. As far as I know, HELOC rates are variable and around 7% now – not exactly cheap money when that $200K luxe kitchen remodel is now costing $14K/yr and your home equity is falling. I understand making a conscious bet on rates declining, but that’s not without risk.
Up here in Canada your HELOC can float or you can take any portion of it and put it into a fixed term at a fixed rate. I did well for years by getting a HELOC on my mortgage free home and borrowing from it to buy Canadian bank stocks whose predictably increasing dividend more than covered my fixed term costs, so it was a cash flow positive situation immediately. Bonus was that the interest I paid was tax deductible as an investment expense, while the dividend income was taxed a low rate. Risk was that the bank stock might fall in value or that interest rates would suddenly go up when my 1 or 3 year term had to be re-negotiated (never happened) but you could also score capital gains, which I did.
H-Man, right on about taking the home equity juice to save the day.
Add in cash out refis that were made up to the jump in rates….
The chart shows that HELOC’s took off when mortgage rates climbed, not when home prices increased. Refi’s fell off a cliff in 2022. People who would have refinanced the mortgage to update the kitchen were now turning to HELOC’s. Why would anybody trade a 3% mortgage for a 6+% mortgage just to buy some new cabinets?
I mean, TransUnion said the same thing (i.e., consumption is being financed in part by home equity). Do you reckon TransUnion doesn’t know what they’re talking about?