Americans have a new piggy bank to raid --- their houses

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American consumers have surprised many economists this year by continuing to spend even as their savings shrink and the labor market cools. They've been aided in part by pockets of deflation that have boosted their purchasing power on things such as gasoline, automobiles and airfares.

But with the personal saving rate near its lowest level since the mid-2000s, it's fair to ask whether consumers will keep spending. The slow revival of a long-dormant financial product may offer a partial answer.

Home equity loans give people with substantial wealth locked up in a house the ability to take money out to fund things like renovations or debt consolidation or a family vacation without having to refinance their entire existing mortgage. We've started to see a slow but consistent rise in such loans on bank balance sheets, with 2025 looking like a year of growth for a product that fell out of favor after the subprime mortgage crisis.

There's good reason why home equity loans faded into irrelevance. Underwriting standards tightened significantly following the 2008 financial crisis after being way too loose in the mid-2000s. It took years for home values to go up enough for homeowners to even have enough equity to borrow against. Households generally spent much of the 2010s paying down debt rather than taking on new debt. And mortgage rates continued to hit new lows throughout the decade, making a full mortgage refinance more compelling than home equity loans, which are pricier.

For people of a certain age, there was also a negative stigma attached to home equity loans - in the aftermath of the 2008 recession, a stereotype that gained little sympathy was the homeowner who borrowed against their house to buy a boat or a car, only to wind up losing their job and house.

There are two types of home equity loans. Fixed-rate loans function as a second mortgage with a lump sum being borrowed, a predetermined repayment schedule, and usually a fixed interest rate. And there are home equity lines of credit, or HELOCs, which act more like credit cards; they have variable interest rates and allow borrowing up to a set limit.HELOC balances at banks shrank throughout the 2010s and even in the early 2020s as low mortgage rates incentivized full refinancings. Revolving home equity loans have been climbing by 1% or more, year over year, in recent weeks, indicating banks and borrowers are beginning to favor these products again.

This is particularly noteworthy since unlike regular mortgage rates that have already priced in a significant number of expected rate cuts by the Federal Reserve, HELOCs tend to be priced off the central bank's policy rate. Should the Fed end up reducing its benchmark by 2 percentage points or more by the end of 2025, as markets currently expect, HELOC rates would fall substantially.

Tens of millions of American homeowners find themselves somewhat trapped in their current houses, tied down by the rock-bottom mortgage rates they locked in during the pandemic. Many of these properties have seen considerable appreciation, too.

So if a homeowner with a 3% mortgage wants to borrow to redo a kitchen or build an extension, a HELOC may well appeal. Bank OZK, a regional bank that operates in states including Florida, Georgia, North Carolina and Texas, is advertising HELOC rates of 9%, which it calculates based on the Wall Street Journal's Prime Rate plus a margin. That rate could easily fall to 7% or 8% once the Fed gets going.And there's a lot of equity for households to tap. Owners' equity in their property assets - the part that's mortgage-free - has climbed sharply since the pandemic to levels last seen in the 1960s. Many of these homes are what's considered old housing stock, in need of upgrades, especially if young families find their starter homes have become their forever homes.

The bottom line is that as the cooling labor market makes it more difficult for Americans to keep spending, high levels of home wealth and anticipated Fed rate cuts provide a compelling backdrop for a home equity loan comeback. A good rule of thumb is to never bet against the American consumer - especially when lower rates are giving homeowners a new piggy bank to raid.

(COMMENT, BELOW)

Previously:
• 10/03/23 America's greatest public policy success is now in jeopardy
• 09/12/23 The housing market is tilting in favor of renters
• 08/18/23 RIP recession. Is it time to worry about
• 05/24/23 This Goldilocks economy has an end date
• 05/24/23 Bye-Bye, New York. Hello, Fayetteville
• 04/04/23 What makes this economic slowdown different from the others?
• 02/15/23 Higher mortgage rates is what the housing market needs now
• 01/06/23 The January inflation bump Americans should welcome
• 01/04/23 Why millennials are following boomers to the South
• 10/24/22 Two bright spots in a cooling housing market
• 08/18/22 Future remote workers need to network more --- in college
• 06/17/22 Housing market cooldown will only lead to more dysfunction
• 05/27/22 Welcome to our be-careful-what-you-wish-for economy
• 05/04/22 The Amazon economic indicator says inflation is easing
• 01/20/22 Don't call me on Friday. That's my 'me time'
• 01/06/22 2022 is the year to buy your first luxury electric car
• 06/03/21 The post-pandemic boom will have a sequel in 2022
• 05/31/21 Florida may lose some of its boomer shine
• 01/11/21 Colleges bet on football in their own K-shaped recovery
• 12/31/20 Just send the bigger bucks already
• 08/24/20 Young people can't buy homes until older owners . . . move on
• 08/18/20 Our pandemic love affair with e-commerce could soon sour
• 08/10/20 Booming 'zoom towns' should ease city housing costs
• 07/11/20 With a Biden economy, will America be condemned to relive the '70s?
• 07/14/20 Renting and homebuying swap roles in the covid-19 market
• 07/13/20 Markets may have a reason to rise along with covid-19 cases
• 04/27/20 U.S. economy may have hit the coronavirus bottom
• 11/12/19 The 2020 economy should feel a lot better: What to, realistically, expect
• 04/23/19: Gen Z is likely to temper aging socialist millennials
• 03/25/19: All signs point to a housing boom ahead
• 02/19/19: Trump's economic gamble might make sense
• 02/15/19: Scaring off Amazon will backfire for the Left
• 01/29/19: The 2020 election will shred the Obama coalition
• 11/15/18: Amazon proving the 'rich get richer'?
• 11/13/18: How gerrymandering can reduce the partisan divide
• 10/22/18: The politics of the next recession will be a disaster
• 08/02/18: The future of the US looks a lot like ...
• 05/05/18: Brick-and-mortar stores may start to make sense again
• 05/05/18: College admissions season is about to get much easier
• 05/03/18: Changing housing needs of millennials will change economic development
• 02/13/18: The big idea for Middle America is to think small
• 02/07/18: Dems are caught in a tax bill trap this year
• 10/25/17: Good times have come to Trump-leaning states

Sen is a portfolio manager for New River Investments in Atlanta and has been a contributor to the Atlantic and Business Insider.