The home equity lines of credit that faded after the housing boom are beginning to make their rebound. The growing revival in consumers taking out loans secured by their homes is being driven by several factors, but the main factor is that home prices have finally stabilized and are actually starting to rise. Is this a reflection of the economy? Housing has rebounded and you see people out there actually buying other things which shows good signs.
Nationally, home equity lines of credit by banks peaked at $668 billion in 2008, just as the recession was hot from an overheated housing market that was beginning to collapse. By 2012 they had decreased by 17% to $554 billion, according to the Federal Deposit Insurance Corp. But some banks are advertising home equity lines of credit again, often with low introductory rates.
During the housing bubble, when many lenders and investors mistakenly assumed residential real estate values would keep appreciating, some consumers overused the equity in their homes to buy whatever they wanted – from home appliances to vacations – and supported a lifestyle their income could not which ended in financial hardship and ruin.
But lending standards have tightened since then. The home equity loans and lines of credit that lenders are looking to issue now require the borrower to retain typically a 20% equity stake, so there is sufficient margin of safety there. Although financial institutions have been criticized by politicians for not doing enough lending since the recession, the problem for banks has been finding qualified borrowers who are reasonably certain to pay the money back. As the economy improves and people and businesses become more confident in their financial position, borrowing should grow. Banks are in the business to loan money. But construction loans and business lending is still slow, so businesses are kind of holding back a little bit.
In a March report, real estate price forecasters said that trends point to a return to a normal housing market with prices projected to grow 3.3% per year in the next five years in the United States. This may mean that some of the homeowners borrowing against home equity today don't necessarily need the money, it's just too inexpensive to pass up.