00:00 Speaker A
Home equity is the difference between your home’s current market value and what you still owe on your mortgage. According to a new study by Point, millions of homeowners are unable to access their home equity through traditional loans because of shifts in the economy. Joining me now, we’ve got Aaron Terrazas, who is the point economist.
00:17 Speaker A
All right, let’s back up for a second and just first talk about how Americans typically use home equity to their advantage. Can you break that down?
00:25 Aaron Terrazas
Of course, it’s great to be here with you, Brad. Americans typically use their home equity for four things. You know, first and foremost is home renovation. There is an increasingly aging housing stock that needs to be updated. Second is higher education, third is end-of-life care, and fourth is paying off higher interest debt. You know, those are the four things that typically Americans tap the home equity for.
00:50 Speaker A
And so your study found that two major shifts in the economy are causing millions of Americans to be locked out of accessing their home equity. Explain how the changing economy is contributing.
01:01 Aaron Terrazas
There are really these two forces converging at the same time, and first is higher for longer interest rates. You’ve been talking about it. Interest rates, particularly long-term interest rates, have moved up. That means refinancing, taking cash out of the home is more expensive for a lot of homeowners. Uh and second, the the shift in the labor market. We’re all watching layoffs increase, uh kind of the unemployment rate kind of tick sideways, maybe a little bit higher, but careers are no longer just a a linear path upward.
01:41 Aaron Terrazas
Jungle gym careers make it hard to document income, make it hard uh to to document employment status, and that is typically what home equity lenders are looking for.
01:52 Speaker A
So walk us through more of the stats on on homeowners experience negative credit shocks in a given year.
01:59 Aaron Terrazas
Yeah.
02:00 Aaron Terrazas
Yeah, so kind of we looked at these labor market credit shocks, things like a a loss of a job, a shift into unemployment, a shift into self-employment, um or even just a decline in income if someone takes a job that that has lower pay than they previously had. That’s all, you know, the longer it goes on, potentially going to affect their credit score, and that means they might not be able to access their home equity. In total, we estimated about 5 million Americans, um 5 million Americans with a with a mortgage can’t access their equity. Um that locks up about 730 billion dollars in home equity. Um you know, in a good year, about one in nine Americans experiences one of these shocks. In a bad year, it it can be much higher.
02:42 Speaker A
Does this vary by region from what you’ve seen?
02:46 Aaron Terrazas
Sure, there there is kind of um some regional regional uh variation. Um the biggest kind of uh clusters of of locked in equity are are in the west, um and and the south. There’s also kind of 150 to 120 in the Midwest and Northeast, but again, the west, kind of where home values are very high, and the south where there have been a lot of um home purchases recently, homeowners who locked in relatively high uh mortgage rates.
03:11 Speaker A
Is there any remedy that’s in sight? What’s your outlook?
03:17 Aaron Terrazas
You know, the labor market is shifting, and the reality is home equity lending has not kept up with a shifting labor market, a shifting economy. And so, you know, instead of borrowing from a from accumulating equity in the past, I think it increasingly makes sense to borrow against future home equity gains.
03:33 Speaker A
Aaron, thanks so much for taking the time here with us. Thanks for breaking this down as well. Really important issue.
03:39 Aaron Terrazas
Thank you.