Though the rate of home price appreciation has begun to slow in recent months, the explosive growth of the last few years has driven tappable equity – the amount available for a mortgage holder to access while retaining at least a 20% equity stake in their home – to one new height after another, according to the latest Mortgage Monitor Report from the Data & Analytics division of Black Knight Inc.
According to Black Knight Data & Analytics President Ben Graboske, a nearly-quarter-trillion dollar increase in tappable equity over the third quarter has resulted in not only yet another record high, but also the lowest total market leverage on record.
“Home price growth in the third quarter – while less than half that of Q2’s history-making rate – added more than $250 billion to Americans’ already record levels of tappable equity,” says Graboske. “The aggregate total of $9.4 trillion is up an astonishing 32 percent from the same time last year and nearly 90 percent higher than the pre-Great Recession peak in 2006.”
“As prices have surged over the past 18 months, the average mortgage-holder’s equity stake has risen by $53,000,” adds Graboske. “That works out to nearly $178,000 available in tappable equity to the average homeowner with a mortgage before hitting a maximum combined loan-to-value ratio of 80 percent. What’s more, in the third quarter, homeowners tapped into their equity at the highest rate in more than 14 years as cash-outs made up 54 percent of all refinances.”
This month’s Mortgage Monitor also examines the impact of rising prices and interest rates on home affordability, finding that the monthly mortgage payment (principal and interest) to purchase the average-priced home with 20% down has jumped by nearly 25% since the start of the year. Factoring in incomes as well as prices across the country, it now requires 22.4% of the median income to purchase the average-priced home with 20% down and a 30-year mortgage. This is the largest share of income required for a home purchase since late 2018, when interest rates were near 5%, but still far below the 34%+ payment-to-income ratio reached in 2006.
“Data points like these inevitably, and understandably, lead to comparisons with the run-up to the Great Recession,” continues Graboske. “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 percent 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.”
A ratio higher than 20.5% in recent years has correlated with a slowdown in the rate of home price growth, but today’s inventory shortages continue to put upward pressure on prices. The slight improvements seen in for-sale listings this summer have begun to plateau, leaving the market with a 54% deficit in for-sale properties compared to 2017-2019 averages. 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. Much more detail on this and more can be found in Black Knight’s October 2021 Mortgage Monitor Report.
“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,” says Graboske. “In fact, the average borrower’s mortgage debt is just 45.2 percent 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.”
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