HELOC Balances Rose $23 Billion in Q3, Biggest Quarterly Jump Since 2005, New York Fed Says

Americans are borrowing against their houses faster than at any point in 21 years.

Home equity line of credit balances rose $23 billion in the third quarter to $481 billion, the largest quarterly increase since 2005, according to the Federal Reserve Bank of New York's Quarterly Report on Household Debt and Credit, released Tuesday, Nov. 10. Balances are up $59 billion from a year earlier. It is the 18th consecutive quarterly increase.

HELOC limits grew too, rising $31 billion in the quarter.

Why owners are borrowing instead of moving

The lock-in effect is the main backdrop. Realtor.com's analysis of federal mortgage data found 49.1% of outstanding mortgages carried rates of 4% or lower as of the second quarter. The average 30-year fixed rate was 7.3% on Tuesday, according to Mortgage News Daily, and averaged 7.33% in October, 110 basis points above a year earlier.

Selling means swapping a 3% or 4% loan for a 7% one. A HELOC lets an owner pull cash out and leave the first mortgage alone.

"HELOCs let them borrow against their equity without giving up the low interest rate on their home," said certified financial planner Douglas Boneparth, president of Bone Fide Wealth in New York.

The housing market is not moving. The National Association of Realtors put the median existing-home price at $417,500 in September, up just 1.3% from a year earlier but nearly 54% above September 2019. Quartz's reading of the data notes that an index of contract signings for previously owned homes hit a record low in September.

Plenty of equity to tap

Mortgage holders collectively held $17.5 trillion in home equity in the third quarter, according to Intercontinental Exchange. Tappable equity, meaning what an owner can borrow while keeping at least 20% in the home, averaged $204,000 per borrower, up 1.2% from a year ago.

"Homeowners are sitting on substantial housing wealth, with 2.4 million mortgage holders now holding at least $1 million in equity," said Andy Walden, head of mortgage and housing market research at ICE.

For scale, HELOC balances peaked at roughly $714 billion in the first quarter of 2009. Today's $481 billion is about two-thirds of that.

The rest of the household balance sheet

Total household debt grew $334 billion, or 1.8%, to $19.1 trillion. Mortgage balances rose $257 billion to $13.4 trillion, and mortgage originations reached $595 billion.

Credit card balances rose $22 billion to $1.29 trillion. Auto loans rose $21 billion to $1.73 trillion. Student loans edged up $5 billion to $1.66 trillion.

Overall, 5.0% of outstanding debt was in some stage of delinquency, up 0.3 percentage point from the prior quarter. Early delinquency transitions ticked up for auto loans and mortgages. Serious delinquency transitions for mortgages worsened but remain low by historical standards, the New York Fed said.

What the New York Fed says about risk

The New York Fed's own read on housing debt is reassuring. "Although delinquency transition rates for housing debts have crept up, the overall credit quality of these loans remains strong," said Donghoon Lee, economic research advisor at the bank.

The HELOC numbers back that up so far. The share of HELOC balances moving into serious delinquency, meaning 90 or more days past due, was 1.17%, down from 1.27% a year earlier. The transition rate for HELOCs was flat in the quarter.

Boneparth's concern is about what comes next for borrowers. "Payments potentially could double overnight, and you really want to know that before you sign anything," he said. Many HELOCs have an interest-only draw period followed by a repayment period that adds principal. "If your budget only works at today's rate, then your budget doesn't really work," he said.

HELOC rates are variable and track the prime rate. The average rate on a $30,000 HELOC was 7.49% on Nov. 4.

The rate path ahead

That variable rate is heading into a tightening Fed. Consumer prices rose 0.4% in October after a 0.6% jump in September, the Bureau of Labor Statistics reported Tuesday. The agency did not publish year-over-year figures because it could not collect data during last year's government shutdown. The New York Times calculated prices were up around 4% from a year earlier, against 3.7% in September.

Fed policymakers have signaled they will raise rates at their Dec. 8-9 meeting. On Tuesday, Fed Governor Christopher Waller said a quarter-point increase would suffice if price pressures eased. But with core inflation at 0.3% or more, as October's data showed, he warned that a quarter-point move would put the Fed's credibility at risk: "Hiking only 25 basis points would put our credibility at risk, a risk I am not eager to take."

The prime rate that HELOCs follow is influenced by the Fed's moves, though the Fed does not set it. Two-year Treasury yields rose more than 0.1 percentage point Tuesday to 4.67% as investors bet on more hikes.

The New York Fed's next quarterly report will show how much of the HELOC boom was drawn at 7%-plus rates, and whether a December hike, possibly half a point, starts to show up in delinquency.