Soaring home values are fueling a rise in cash-out loans and credit

Steve Brown - Dallas Morning News - 16 SEP 2016

With home prices in the Dallas-Fort Worth area soaring over the last few years, local property owners are sitting on billions of dollars.

Texans have some of the highest home equity rates in the country, according to CoreLogic.

At midyear, only 1.5 percent of D-FW residents with home loans owned more than their house is worth — one of the smallest percentages of underwater homes in the nation.

With so much money locked in housing, the number of consumers breaking into that piggy bank is growing. Homeowners are refinancing their properties to pull out cash or getting lines of credit tied to the equity in their homes.

"Home equity lines of credit were up 36 percent in the second quarter compared to a year ago in Dallas," said Daren Blomquist, economist with Attom Data Solutions, formerly known as Realtytrac. "The increase in HELOCs in Dallas was the largest in any of the 74 metro areas we track nationwide.

"It's definitely a sign that people are leveraging their equity and are confident in the housing market."

Consumers use home equity lines of credit to pay off debts, fund big purchases or just have an extra credit balance at the ready for an unexpected expense.

Typically the loans are interest-only financing for the first 10 years.

In previous cycles, many homeowners with lots of equity in their houses traded up to nicer digs or bought a second property.

But with high housing costs and a shortage of homes for sale in North Texas, that might not be an attractive option for some homeowners with a wad of equity.

Currently almost 64 percent of home loans made in the U.S. are refinancings.

The share of cash-out refinancings is at the highest level in eight years — about 10 percent, according to Freddie Mac. But cash out refis nationwide are still about a third of what they were before the Great Recession.

In the first quarter of 2016 alone, U.S. homeowners got almost $16 billion from cash out refis and home equity lines of credit.

Blomquist said lenders — who well remember the last housing market crash — are more stringent in their underwriting of home debt. "Lenders are being very cautious still."

CoreLogic chief economist Frank Nothaft said mortgage companies are trying to limit their risk with loan requirements that more closely track the value of the property — "a big change from practices 10 years ago."

"House prices in Texas are up over the past decade, and in some markets up a lot," he said. "The appreciation has provided equity growth and enabled homeowners to tap into the equity through cash-out refinance or placement of a HELOC."

Tough credit standards should keep consumers from using their houses like a cash machine with no limits, said Jonathan Smoke, chief economist with Realtor.com.

"It does not look like The Big Short all over again," Smoke said. "I would expect that an increase in cash-out refinancings and more HELOCs would be a logical result of recovering home equity balances, and that would be most significant in markets like Dallas where home values are at record levels."