Home equity is the difference between the value of a home and the amount still owed on it.
If the value of a home stays flat, home equity rises slowly -- one mortgage payment at a time. But if the value of a home rises quickly, the amount of equity jumps along with it.
That exact scenario is playing out all over the country, with rising home prices pushing US home equity to a record high of $23.6 trillion in Q2 -- leading homeowners to cash out their equity at record levels as well.
Per Bloomberg, US homeowners logged 1.1 million+ cash-out refinances* in Q2, and are using their newfound cash to pay for renovations, invest in stocks, and probably buy NFTs (non-fungible tokens).
So how’d the market get so frothy?
When the pandemic struck, the federal government took several steps to stabilize the economy, including embarking on a massive bond-buying program.
The program sent mortgage rates downward, kicking off a virtuous cycle:
As a result, home prices jumped by 11% in 2020, then 17% in 2021.
The Federal Reserve plans to wind down its monthly bond purchases before ending them in mid-2022. The move would likely push mortgage rates higher, putting a damper on the current cycle.
However, some analysts believe the housing market will stay hot -- claiming a shortage of inventory with sustained demand could keep current prices intact.
Even if prices do fall a bit, it could bring sidelined buyers back into the mix, pushing prices up again and kicking off a new cycle of refinancing.
*Cash-out refinancing: A type of mortgage refinancing option where homeowners get to pocket cash in exchange for taking on a larger mortgage.
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