GALLUP NEWS SERVICE
PRINCETON, NJ -- The dollar amount of home equity loans and lines increased at a 14.6% annual rate over the first three quarters of 2006, according to the American Bankers Association. This is down from a 17.4% rate of growth in 2005 and a 31.2% increase in 2004. As a result, it is not surprising that 25% of homeowners say they have both a first mortgage and a home equity loan or line in a recent Experian/Gallup Personal Credit Index (PCI) poll.
While the pervasiveness of home equity borrowing makes good sense given current tax incentives and most home equity loan/line interest rates, it may also be a reason for concern. What happens to home equity borrowers and the U.S. economy if the nation's residential real estate markets continue to decline as the year unfolds?
About Two in Three Homeowners Have a Mortgage
Although most Americans probably assume every homeowner has a first mortgage loan, the reality is that many do not. Of the three in four Americans saying they own their homes in the Experian/Gallup PCI poll, only about two in three (63%) report having a first mortgage. Although 84% of homeowners in the 30 to 49 age range have a first mortgage loan, as do 78% of those aged 18 to 29, this percentage falls to 61% for those in the 50 to 64 age range and to just 24% of those aged 65 or older. Similarly, 80% of homeowners making $75,000 a year or more have a first mortgage, compared with 69% of those making at least $40,000 but less than $75,000 and only 41% of those making less than $40,000.
One in Five Homeowners Have a Home Equity Loan
About one in five (21%) homeowners report having a fixed- or variable-rate home equity loan that they are currently paying off. Thirty-one percent of homeowners in the 18 to 29 age range report having a home equity loan, compared with 24% of those aged 30 to 49 and 21% of those aged 50 to 64. Only 8% of homeowners aged 65 or older report having a home equity loan. One in four homeowners making $75,000 a year or more and 22% of those making between $40,000 and $74,999 report having a home equity loan, while just 15% of those making less than $40,000 have such a loan.
Nearly One in Five Homeowners Have a Home Equity Line
Nearly one in five (18%) homeowners report having a home equity line, that is, an account that they can borrow money on whenever they wish to do so. Nineteen percent of homeowners in the 18 to 29 age range report having a home equity line, compared with 21% of 30- to 49-year-olds and 22% of 50- to 64-year-olds. Only 11% of homeowners aged 65 or older say they have a home equity line. More than one in four homeowners (28%) making at least $75,000 a year, 16% of those making between $40,000 and $74,999, and just 11% of those making less than $40,000 have a home equity line.
About One in Three Consumers Used a Home Equity Loan to Make Home Improvements
Today, Americans use the home equity loan/line for a wide variety of purposes. The most common of these remains the financing of home improvements or repairs, with 36% of consumers reporting they borrowed against their home equity for this purpose. Another 17% say they used their home equity loan/line to consolidate debt or pay off their credit cards. Seven percent say they used the loan/line to pay medical (4%) or education (3%) expenses. Seven percent reported getting their loan/line for some kind of emergency.
Should Americans Be Concerned About the Pervasiveness of Home Equity Borrowing?
Deteriorating conditions in the nation's residential real estate markets suggest that the growth of home equity borrowing will decline further in 2007, continuing its trend of the past couple of years. Because consumer spending accounted for approximately 87% of the surprisingly strong GDP growth in the fourth quarter of 2006, a substantial reduction in consumer home equity borrowing has the potential not only to significantly restrain consumer spending but also to slow overall economic growth this year.
Probably more important to the future of the U.S. economy, however, is the potential for a significant number of home equity loan defaults. In theory, even a housing market characterized by slow sales and declining prices will not necessarily lead to a sharp increase in home equity loan defaults. The largest source of those defaults may occur in cases where new creative financing involving a home equity loan combined with a first mortgage was used to buy a home.
Still, the U.S. economy has no experience with a consumer debt problem characterized by a significant number of home equity loan defaults. Home equity borrowing simply has not been that extensive during past economic downturns of a significant magnitude.
Survey Methods
Results for the Experian/Gallup personal credit index poll are based on telephone interviews with 3,053 adults, aged 18 and older, conducted October through December 2006. For results based on the total sample of consumers, one can say with 95% confidence that the maximum margin of sampling error is ±2 percentage points. In addition to sampling error, question wording and practical difficulties in conducting surveys can introduce error or bias into the findings of public opinion polls.
