The "Home ATM" Stays Mostly Closed in Q2

Mortgage Equity Withdrawal (MEW) was slightly positive in Q2 2023

During the housing bubble, many homeowners borrowed heavily against their perceived home equity - jokingly calling it the “Home ATM” - and this contributed to the subsequent housing bust, since so many homeowners had negative equity in their homes when house prices declined. Note: Very few homeowners have negative equity now - unlike during the housing bubble.

Refinance activity declined significantly in early 2022 as mortgage rates increased, and I was expecting MEW to also decline as fewer homeowners used cash-out refinancing. However, in mid-2022, homeowners switched to using home equity loans (2nd loans) to extract equity from their homes.

The Fed noted this increase in demand for HELOCs in the October 2022 Senior Loan Officer Opinion Survey on Bank Lending Practices: “banks reported tighter standards and stronger demand for home equity lines of credit (HELOCs).” However, in the January 2023 and April 2023 and July 2023 surveys, the Fed noted that “banks reported tighter standards and weaker demand for home equity lines of credit (HELOCs).” emphasis added

Since demand weakened this year for HELOCs, and refinancing activity is off sharply, MEW turned negative in Q1 and only slightly positive in Q2. Mortgage Equity Withdrawal is an aggregate number and is a combination of homeowners extracting equity - hence the name "MEW" - and normal principal payments and debt cancellation (modifications, short sales, and foreclosures).

There are few debt cancellations now, so little MEW suggests that normal principal payments offset equity borrowing in Q2.

Quarterly Increase in Mortgage Debt

Here is the quarterly increase in mortgage debt from the Federal Reserve’s Financial Accounts of the United States - Z.1 (sometimes called the Flow of Funds report) released today. In the mid ‘00s, there was a large increase in mortgage debt associated with the housing bubble.

In Q2 2023, mortgage debt increased $90 billion, up from $55 billion in Q1, and down from the cycle peak of $471 billion in Q2 2021. Note the almost 7 years of declining mortgage debt as distressed sales (foreclosures and short sales) wiped out a significant amount of debt.

However, some of this debt is being used to increase the housing stock (purchase new homes), so this isn’t all Mortgage Equity Withdrawal (MEW).

Mortgage Debt as a Percent of GDP

The second graph shows household real estate assets and mortgage debt as a percent of GDP.  Note this graph was impacted by the sharp decline in Q2 2020 GDP.

Mortgage debt is up $2.15 trillion from the peak during the housing bubble, but, as a percent of GDP is at 47.9% - down from Q1 - and down from a peak of 73.3% of GDP during the housing bust. This means most homeowners have large equity cushions in their home, and some MEW is not a concern.

On homeowner equity, earlier today CoreLogic noted: CoreLogic: Home Equity Increases From Winter to Spring, Reducing Underwater Properties in Q2

The report shows that U.S. homeowners with mortgages (which account for roughly 63% of all properties) saw home equity decrease by 1.7% year over year, representing a collective loss of $287.6 billion, and an average loss of $8,300 per borrower since the second quarter of 2022.

However, U.S. homeowners with mortgages gained on average $13,900 quarter over quarter, amounting to a collective increase of $806 billion – or a 5.2% gain – in home equity. And while borrowers in the West continued to experience the largest year-over-year equity losses, homeowners in states like Hawaii, California and Washington still have the most accumulated equity due to the pace of appreciation over the past decade.  

The value of real estate, as a percent of GDP, increased in Q2 - but is below the peak in Q2 2022 - and is well above the average of the last 30 years.

Calculated Risk Estimate of MEW