U.S. homeowners hold record $11.5 trillion in tappable home equity but barely use it

U.S. homeowners have more housing wealth than ever before, thanks to fast-rising home prices over the last several years. But they aren't spending very much of it.

In the second quarter of this year, there was a collective $11.5 trillion in so-called "tappable" home equity, according to Cotality, a data technology company. That is the amount borrowers could take out in debt while still leaving enough in the home to satisfy lenders. In total equity, borrowers with a mortgage have $17.9 trillion, or, on average, $310,000 per homeowner, which is $6,000 more than they had in the previous three months.

While homeowners did originate nearly 20% more second mortgages or home equity lines of credit (HELOCs) compared with the first quarter, it still represented less than 0.1% of the total tappable equity that they could have used.

"The borrowers with the most housing wealth are often the least likely to tap it," said Thom Malone, principal economist at Cotality. "They tend to have low mortgage rates, strong cash flow, and little reason to move."

So all that cash sits on the sidelines and continues to compound because home prices in most areas of the country are still seeing small gains. Consumers are also increasingly nervous about the state of the economy and rising interest rates. Taking out a second loan would mean doing so at a much higher rate than they likely have on their primary mortgage, which most people won't do unless absolutely necessary.

Mortgage rates dropped to record lows in the first two years of the Covid pandemic, meaning anyone who purchased a home during or before that time has a rate that is at least one third of what rates are today. Those lower monthly payments give them much stronger cash flow in general, so they're able to fund things like renovations or even college tuition without digging into their home equity.

All real estate is local, and there are wide variations as equity is heaviest in the West and Northeast. Average homeowner equity levels in Hawaii and California were over $600,000 and over $400,000 in Massachusetts. In Louisiana, Oklahoma, and Iowa, by contrast, equity levels are just over $100,000. Not only are the differences stark but they are actually widening, as home price appreciation is stronger in already high-equity markets.

While homeowners in most states have gained equity, some are seeing home values drop and are therefore losing equity. These include states like Texas, Minnesota, Colorado, and Maryland, as well as the District of Columbia. The share of borrowers who owe more on their mortgages than their homes are worth, so-called underwater mortgages, is still quite low at just 2.1%.