Home equity is sitting above the $15 trillion mark nationwide, according to the Federal Reserve, but interest in more costly forms of debt, like credit cards or personal loans, has been outpacing that of home equity loans and lines of credit since the financial crisis.
At the end of February, outstanding HELOC balances at all commercial banks in the US fell to $346 billion, according to the Federal Reserve Board of Governors. They’re down 43% from the peak in April 2009 – and back to where they’d been in July 2004. This marks a decline that has now lasted 10 years.
Housing-related debt peaked in Q3 2008 at $10 trillion. HELOC balances were 6.1% of the total. Housing debt in Q4 2018 stood at $9.5 trillion. HELOC balances were down to 3.6% of the total.
From 2002 till the peak in April 2009, HELOC balances had soared by nearly 300%. Homeowners were using their homes, whose prices were soaring, as ATMs. This money was plowed back into the economy in form of consumption, as a down-payment for rental properties, or invested in the latest stock.
The housing-and-mortgage crisis annihilated those dreams of the endless ATM. The chart above shows the furious HELOC bubble and the subsequent decade-long decline in terms of year-over-year percentage changes in the balances.
After the mortgage crisis, Americans learned an invaluable lesson on credit. Credit card debt is unsecured so the lender can sue the borrower, get a judgement and collect before the borrower files for bankruptcy protection. But a home equity line of credit is a loan secured by a home so the lender doesn’t have to sue the borrower to collect but can foreclose on the home.
HELOCs carry lower interest rates than unsecured credit, such as credit cards, payday loans, or personal lines of credit. They’re a legitimate, and in some cases a smart way to borrow. But there’s a big risk: the homeowner puts the house on the line.
How Americans abused HELOCs before the mortgage crisis and how demand for HELOCs has since collapsed — despite all efforts by the Fed to stimulate this sort of borrowing that leads to consumption — is one of the more interesting long-term shifts in consumer behavior to come out of the crisis.