“If it’s done responsibly, it can be a very positive move for consumers. The danger happens when that home equity is used to pay off high interest rate loans. Consumers continue to accumulate additional debt on some of those products and they are over leveraged – that’s what consumers need to watch out for.”
According to the Federal Reserve, roughly half of mortgaged homes have an equity position greater than 50% of the property’s value. But a recent study by Black Knight has found that new home equity has dwindled considerably this year, and about $1.5 trillion of that has vanished since May, meaning that the average borrower has also lost about $30,000 in equity.
In response to the data, Mellman pointed out that the figures applied only to the owners of new homes. “Homeowners that have been in their homes for multiple years still have a tremendous amount of home equity built up – that’s where that nearly $20 trillion figure comes from, and that includes consumers that own their home outright.”
But with the threat of a decline in home prices – some experts believe they could fall by as much as 20% next year – Mellman was asked whether there was an underlying risk for homeowners as their equity could erode dramatically in the coming months.