Homeowners across the United States are finally dipping their toes back in the waters of home equity utilization, driven by recent shifts in interest rates and economic conditions. After sitting on enormous financial reserves during the past two years, many are starting to extract cash from their homes and invest it wisely, whether it’s for necessary home improvements or personal expenses.
According to recent data from ICE Mortgage Technology, mortgage holders withdrew $48 billion from their home equity during the third quarter of this year. This marks the highest volume seen since the Federal Reserve began hiking its benchmark interest rate, which has significantly influenced the housing market and borrowing patterns. With the Fed cutting rates by half a percentage point in mid-September, many homeowners are finding the timing right to utilize their equity more decisively.
The trend has been noteworthy, especially considering homeowners are currently sitting on over $17 trillion worth of equity. Out of this, around $11 trillion is classified as tappable equity, meaning homeowners can borrow against it without breaching the 20% equity rule demanded by most lenders. The average homeowner now boasts approximately $319,000 of equity, with around $207,000 available to borrow.
Despite this wealth, activity has been cautious. Historically, homeowners withdrew 0.42% of their tappable equity this past quarter, which is less than half the extraction rate observed over the decade leading up to recent Fed rate hikes. Andy Walden, vice president of research and analysis at ICE, noted, "Over the past 10 quarters homeowners have extracted $476 billion in equity, which is exactly half of the extraction we’d expect to see under more normal circumstances." This translates to nearly $500 billion of untapped equity sitting dormant, not entering the broader economy.
Equity withdrawals have often been funneled back for home renovations, repairs, or even funding significant expenses like college tuition. The pressure of rising borrowing costs has played its part; for example, since March 2022, the monthly payment needed for withdrawing $50,000 through a Home Equity Line of Credit (HELOC) has more than doubled—from approximately $167 to $413 as of January. Although the recent rate cut has slightly eased this burden, the costs remain higher than the 20-year average for HELOCs.
Industry projections suggest the potential for another 1.5 percentage points of rate cuts by the end of next year, providing incentives for homeowners to reevaluate their equity positions. Walden calculated, "If our predictions hold true, it could bring the monthly payment for a $50,000 withdrawal back below $300, which, though still above the average, is over 25% less than the recent highs." This could be influential, especially since many mortgage holders are locked down on favorable first lien rates which tether their home values.
This recovery of home equity tapping, though still modest, is complemented by other key trends. While home prices are moderATING due to increased supply and higher mortgage rates than previous summers, the market is responding tentatively with some caution as the existing economic climate continues shifting.
Now, reflecting on property tax changes, Florida is presenting retirees with promising news. Voters recently passed Amendment No. 5 during the election held on November 5, 2024, which introduces cost-of-living adjustments to the state’s existing homestead exemption policy—a property tax relief initiative for primary homes. This change, set to take effect on January 1, 2025, augurs lower property tax increases for residents moving forward.
The amendment enhances the current homestead exemption by indexing the second $25,000 exemption to the Consumer Price Index, accommodating inflation similar to how Social Security payments are adjusted annually. With 66% of voters backing the amendment, it was comfortably passed, securing the necessary support percentage.
This shift offers potential financial relief for countless homeowners and retirees who have long flocked to Florida for its favorable living conditions and low taxes. The new regulations could help mitigate the financial burdens faced by Floridians, particularly as property values continue to rise.
Under the current structure, homeowners benefit from two exemptions of $25,000 each, which cuts up to $50,000 from their primary home’s taxable value. The impending amendment promises to index future increases to inflation, allowing for consistent adjustments rather than stagnation, which has characterized the existing framework.
Although this prospect of lowered property taxes appears beneficial for homeowners, dissenters have raised concerns over possible adverse impacts on landlords and local government budgets. The homestead exemption is solely for primary residences, meaning landlords who rent properties may not be able to take advantage of these benefits. Consequently, some worry about the need for counties and cities to raise local tax rates to offset any budgetary shortfalls caused by decreased property tax revenues.
Due to the way property tax revenues are allocated, when homeowners pay their property taxes, these funds are distributed among various local agencies, including school districts, city services, and utility companies. While Amendment No. 5 preserves revenue flow for school districts, others stand to lose funding based on how the new structure is implemented.
The consecutive developments related to home equity tapping and property tax modifications have created mixed reactions among various stakeholders. Homeowners are cautiously optimistic, with many seeing tangible financial benefits, especially as they navigate through rising living costs exacerbated by inflationary pressures across the state. Conversely, landlords and municipal officials remain wary, unsure of the potential fallout from such sweeping legislative changes.
All things considered, homeowners feeling the pressures of the economy may find themselves at the brink of beneficial changes, re-evaluated borrowing avenues, and legislative frameworks aimed at easing some fiscal burdens. The approaching months will be pivotal for homeowners eager to pull equity from their homes and for Florida residents adapting to newly adjusted property tax landscapes.
