Tappable equity soared to a new all-time high in October 2021, increasing almost a quarter-trillion dollars in Q3, according to Black Knight’s October 2021 Mortgage Monitor Report.
Black Knight reports that Q3 home price growth added more than $250 billion to Q2’s “history-making rate.” The average homeowner’s equity has risen by $53,000, working out to $178,000 available in tappable equity before reaching an 80% combined loan-to-value ratio. Homeowners tapped their equity in Q3 at the highest rate in 14 years, with cash-outs accounting for 54% of all refinances.
The aggregate total of $9.4 trillion is up 32% YOY and almost 90% higher than the peak in 2006.
“Data points like these inevitably, and understandably, lead to comparisons with the run-up to the Great Recession. It’s therefore particularly important to note that the $70 billion extracted from the market via cash-out refis in Q3 2021 represents just 0.8% of the available tappable equity at the start of the quarter. For context, that’s less than a third of the rate at which people were pulling cash out of their homes at the peak of such activity in 2005,” said Black Knight Data & Analytics President Ben Graboske.
“Underwriting standards are much higher today as well, with the average credit scores of cash-out refinance borrowers more than 50 points higher than during that period, and the resulting LTVs are much lower. In fact, the average borrower’s mortgage debt is just 45.2% of their home’s value – the lowest total market leverage we’ve ever recorded, going back at least to the turn of the century. In short, it’s a markedly different time and market today.”
Mortgage holders are benefitting from a housing market so hot it’s exhausting potential buyers and forcing them to stay renters while they search for a home. The monthly mortgage payment on an average-priced home with 20% down has increased almost 25% from the beginning of 2021.
Comparisons to the pre-2008 market have been trending recently as Fannie Mae and Freddie Mac raised their limits on government-backed loans to $647,200 in most of the country and nearly $1 million in some high-cost American communities.
The GSEs argue that surging home prices and the housing inventory shortage have created a need for high loan limits in areas where middle-class Americans are being priced out.
Homebuyers would have to use 22.4% of income to purchase an average-priced home with a 30-year mortgage, the largest share of income required for a home purchase since 2018 when interest rates were close to 5%.
“Even if home prices held steady, a rise in 30-year rates to 3.5% would result in the tightest affordability since 2009. At 4%, payment-to-income ratios would rise above the 1995-2003 market average, and at 5% would drive affordability to its worst level on record outside of the 2004-2008 bubble,” the report reads.