Faucets at $1,000 Abound as Home Equity Spigot OpensKathleen M. Howley
A year ago, New Jersey contractor Michael Mroz’s customers were focused on saving money when renovating kitchens and baths, he said. Now, with a resurgence of home equity lending, they’re ready to pay for the best.
“People don’t want granite countertops -- they want marble costing at least 25 percent more,” said Mroz, owner of Michael Robert Construction in Westfield, an affluent town less than an hour’s commute to Manhattan. “Money is so cheap today, people can splurge on $1,000 faucets.”
Spending on home renovations is rising to records as banks such as Wells Fargo & Co. and JPMorgan Chase & Co. increase lending for home equity lines of credit, or Helocs, after property prices this year gained at a pace not seen since the last housing boom. Heloc originations could rise 16 percent this year and reach another five-year high in 2014, according to Mustafa Akcay, an economist for Moody’s Analytics, powering the earnings of Home Depot Inc. and boosting the economic expansion.
Helocs are making a comeback as the housing market recovers enough to make the junior mortgages a safer bet for banks more than seven years after the beginning of the housing crash that saddled them with billions of dollars of losses. The median price for an existing home probably will gain 11 percent this year, according to the Mortgage Bankers Association in Washington, after plunging about 33 percent during the crash.
“The biggest use of Helocs is renovations, and the biggest spur for renovations is Helocs,” said Kermit Baker, director of Harvard University’s Remodeling Futures program in Cambridge, Massachusetts. “When the two fuel each other, it has an enormous impact on the economy.”
After home prices began rising in 2012, the number of Americans with negative home equity -- those who owe more on their properties than they are worth -- began tumbling. At the beginning of last year, that was the case with almost 16 million home loans. By the third quarter of this year, that number had dropped to 10.8 million, property data firm Zillow Inc. said in a report last week.
“There is an increase in the amount people are willing to spend on their homes as the values go up,” said Joe Emison, chief technology officer at BuildFax, a real estate data company. “A lot of them feel in a better position today as the job market and the economy has improved.”
Helocs typically are held by banks in their mortgage portfolios rather than being sold in the secondary market to be securitized by Fannie Mae or Freddie Mac, common for primary home loans, said Keith Gumbinger, vice president of HSH.com, a mortgage data firm in Riverdale, New Jersey.
Lenders use them as a hedge against rising rates because they rise in tandem with bank borrowing costs, Gumbinger said. Heloc financing costs usually are tied to prime rates, the interest charged by banks to their most creditworthy customers, with the addition of a margin predetermined by the lender that often is around 2 percentage points.
The biggest Heloc holders are Bank of America Corp., with $81.4 billion in the third quarter, Wells Fargo with $79.8 billion, and JPMorgan with $70.1 billion, according to Federal Reserve data.
Helocs were used during the housing boom to cash in on surging property values to spend on cars or take vacations. Often, lenders allowed the loans to exceed property values by 25 percent on the supposition that home prices were only going up, Gumbinger said.
“If you walk into a bank today and apply for a home equity loan, they are going to want to know what you’re using it for,” Gumbinger said. “In addition to requiring you to have the best credit and retain at least 20 percent equity in your house, they want to know your intentions are good. No more using your home as a cash register to have some fun.”
U.S. banks hold $529 billion of home equity loans on their books. That’s down from a record $674 billion in early 2009 as banks wrote off Helocs made worthless by foreclosures, according to the Federal Deposit Insurance Corp.
“These loans usually are in second-lien position, so they don’t recoup any money until primary mortgage investors get all their money back,” Gumbinger said. “The money just disappeared as home prices went down.”
The national average prime rate has been 3.25 percent since the end of 2008, as measured by Bloomberg. The average rate for a $30,000 Heloc was 5.18 percent last week, the lowest since 2009, according to Bankrate Inc., an interest-rate aggregator based in North Palm Beach, Florida.
The average rate for a 30-year fixed mortgage dropped to 4.22 percent from an eight-week high of 4.35 percent, Freddie Mac said in a statement last week, as investors speculated the Federal Reserve will keep buying mortgage bonds to push down borrowing costs.
Heloc originations will increase to $91 billion in 2013 and increase to $97 billion next year, according to an estimate by Akcay, the Moody’s economist. Both are the highest levels since 2008. In 2007, banks originated a record $310 billion in Helocs, Akcay said.
“The difference between today and 2007, besides volume, is the quality of loans,” said Patrick Newport, an economist at IHS Global Insight in Lexington, Massachusetts. “Banks were making really bad loans back then, with very loose standards. Today, they’re being more cautious.”
Home equity production at Bank of America for the first nine months of 2013 was $4.4 billion, an increase of 69 percent from the first nine months of 2012 when production stood at $2.6 billion, according to Terry Francisco, a spokesman.
Veronica Clemons, a Wells Fargo spokeswoman, and Jason Lobo, a JPMorgan spokesman, said their firms also have increased home equity lending, without providing specifics.
The gains won’t be enough to offset this year’s industry-wide plunge in loan refinancings, said Francisco. Applications for mortgage refinancing dropped 71 percent to a four-year low between May and September, according to Mortgage Bankers Association.
“We’ve seen the number of closed loans increase over the past year, but not to the point it could make up for the significant drop in refinancing,” Francisco said.
Renovation spending this year probably will rise to an all-time high of $146.1 billion, according to Harvard’s Baker. Last year, the spending was $126 billion, he said.
According to Remodeling magazine, a trade publication, most projects don’t add the full cost to the value of the home. Remodeling a basement probably would recoup 70 percent of the outlay when it’s time to sell, and a family room addition likely would see a 63 percent return. A major kitchen renovation is worth 69 percent when the house is on the market, and a master suite addition will return 63 percent, the publication estimates on its website.
Spending on renovations is benefiting retailers who sell construction supplies. Home Depot, the largest, last week boosted its fiscal 2014 earnings forecast after reporting its third-quarter profit net income was 43 percent higher than a year ago. Shares of the Atlanta-based company rose 0.7 percent to $79.75 at the close of New York trading, extending their gain this year to 29 percent.
Mroz, the New Jersey contractor, is working on a two-story addition in Westfield that expands a home’s kitchen and family room. Most of his customers last year wanted crawl spaces under additions as a cost-saving measure, Mroz said. These owners, who declined to be identified or discuss their financing for the project, had Mroz dig a full basement with an extra-high ceiling, he said.
The second floor of the addition has a dormer window protruding from the roofline. Instead of covering it with asphalt shingles to match the rest of their roof, the customers upgraded to copper as an architectural accent, Mroz said.
Home values in Westfield rose 9.1 percent to $646,300 in the past year, according to Zillow Inc., a real estate data firm in Seattle. In the nearby towns of Summit and Plainfield the increase was about 7 percent, and in Short Hills the gain was 6.2 percent, according to Zillow.
“People aren’t cheaping out anymore because more of them are getting Helocs instead of saving up cash,” said Mroz. Getting a Heloc is “a lot easier to do with home prices coming back,” he said.