News Column

Home-equity loans are picking up

May 26, 2014

By Paul Davidson, @PDavidsonusat, USA TODAY

Home-equity loans, which helped fuel Americans' pre-recession spending binges, are climbing out of a prolonged slump as house prices rise. But don't expect them to drive consumer purchases as they did in the boom years.

"Housing isn't providing the same juice to consumer spending," says Mark Zandi, chief economist of Moody's Analytics.

Each $1 increase in housing wealth is leading to about an 8-cent rise in consumer spending -- about half of the traditional effect, Zandi says

Outstanding balances on home-equity lines of credit fell for the 10th straight quarter in the January-March period to $526 billion and are down from $714 billion in the first quarter of 2009, reports the Federal Reserve Bank of New York.

The balances dropped because homeowners continue to shed more debt on home-equity loans taken out in the housing run-up -- through repayments and defaults -- than the amount of new loans being generated.

But a closer look shows that the sector is recovering. Lines of credit originated by lenders rose 20% last year to $92.5 billion, by far the fastest growth since volumes began rising in 2011, according to Equifax and Moody's. By comparison, $383.8 billion in credit lines were originated in 2006.

"It has recovered significantly from where it was just a few years ago," says Greg McBride, chief financial analyst for

Fueling the increase are average home prices that in February were up 23% from their March 2012 low in 20 large cities, according to the S&P/Case-Shiller index. Houses serve as collateral in case of default.

But banks remain cautious. Consumers can borrow 80% to 85% of a home's value, vs. as much as 125% in the mid-2000s, McBride says. With home prices still 20% off their 2006 peak, many homeowners don't have enough equity to meet banks' credit standards.

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Source: USA Today

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