Are HELOCs Making The Fed’s Job Harder?
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
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?