- Americans amassed record levels of home equity during the pandemic housing boom.
- But high mortgage rates are making it difficult for homeowners to take advantage of this wealth.
- Home equity investments are a way to raise cash without taking out a new loan.
The unprecedented surge in home prices during the pandemic has left US homeowners with historic levels of home equity.
However, higher mortgage rates have made it more difficult for Americans to take advantage of this wealth. The crux of the issue is that traditional methods for tapping home equity, like selling a home or taking cash out through refinancing, no longer make financial sense for homeowners.
So as Americans seek out less-traditional avenues to tap their trapped equity, a mini-boom has begun in bank-originated home equity lines of credit or HELOCs. Now, if a group of startups and investors have their way, home equity investments — created by companies that offer homeowners lump sums of cash in exchange for a portion of their equity — will represent a new frontier.
“If people are not incentivized to move or refinance, they’d like to extract trapped equity within their homes,” Chris Abate, CEO of real estate debt investor Redwood Trust, said during the firm’s fourth-quarter earnings call on Thursday. He said the company foresees “strong demand” for the home equity investments in the coming months.
The days of mortgages with rock-bottom rates are gone, resulting in a pullback in both refinances and home sales. In large part, that’s because homeowners who purchased a home or refinanced during the pandemic are unwilling to give up their cheap mortgages. According to a Redfin analysis of government data, 85% of US homeowners tote a mortgage rate far below today’s level of 6%.
Home equity investments, or HEIs, present homeowners with a way to access their equity without losing their current interest rate or amassing substantial debt — a serious consideration today with the cost of living elevated by inflation.
Abate said Redwood anticipates that HEIs will be a “big focus area” for their company, which has invested $316 million in the sector so far.
“Our HEI initiative is really meant to sort of modernize the home equity process, he said. “We are excited about things starting to institutionalize there.”
Redwood isn’t the only company interested in building a portfolio of HEIs. Other institutional investors like Bain Capital, Citigroup, and Prudential Financial are betting on the shared equity products originated by financial tech companies like EquiFi, Unison, Hometap, and Point.
“There’s a lot of smart money that understands both private equity and real estate quite well that’s trying to figure out how to partner in this space,” George Kenny, a managing director at Tangent Capital Partners who is an advisor to EquiFi, said in a statement.