For the first time in 4 years, homeowners are withdrawing more cash from their home’s equity than they are depositing, Capital Economics reports.
Driven by the housing recovery, the improving economy and growing incomes, this impulse to use one’s house as an ATM machine is becoming increasingly widespread.
"Rather than being a temporary blip, we think that this marks the start of a sustained period of equity extraction," according to the report.
For the uninitiated, home equity is the difference between the mortgage balance and the value of the house.
When available, home equity can be a handy, liquid emergency fund, investment pot, nest egg for retirement or a way to get out of more expensive debt.
Most financial advisers, however, would suggest using home equity only for capital improvements that give you a return on your money that's greater than the cost to use it – things like a viable business start up, financing kids' college education, certain home improvements, etc.
Here are some key points revealed by the Capital Economics' report:
• Home equity withdrawal (HEW) turned positive in the fourth quarter 2012, reaching $13.7 billion or 0.5 percent of disposable income. The finding came earlier than Capital Economics had forecast.
• Capital's report concedes, other HEW measures show HEW may still be in negative territory. Either way, little, if any equity was injected into the housing sector by the end of 2012.
• Previously, HEW briefly turned positive in 2009 before heading back into negative territory, but the current return to HEW appears more sustainable.
• HEW today most commonly happens when homeowners move up, rather than take out home equity loans. Capital said HEW is closely correlated with the number of home sales through "turnover extraction" which happens when the a homeowner moves up and the new mortgage is larger than the previous mortgage, effectively resulting in HEW.
• Rising home prices, growing confidence in the housing recovery, increasing incomes and a gradual loosening in mortgage credit conditions should continue to make home equity lending and cash-out refinancing - the other two main sources of equity withdrawal - even more common.
• Don't expect a HEW boom. Home prices are still well off peak prices of the last boom. At the current pace of home price increases, boom-time prices remain years away. Losses inflicted during the housing crash wiped out 50 percent or more of home values in many areas.
• What HEW has returned is a positive indicator for the housing recovery and the economy in general, given consumer spending increases with home equity gains and consumer spending fuels the economy.
