Home equity loans, which accounted for almost 2% of all consumer spending in 2001-2005 are all set to rise again. This could be good news for the overall economy as it will give a boost to consumer spending, which further triggers business activity and GDP growth. Home equity lending activity had seen a dip during 2008 and 2009 as house prices fell continuously.
Consumer spending fueled by home equity loans had averaged more than $100 billion a year in the 2001-2005 period. That is why these loans are considered so important when it comes to giving a boost to the overall economy.
The total amount of these loans this year is predicted to match that in 2008. There is one major difference though. Before the housing market crash, people were taking out home equity loans for all kinds of reasons. House prices were high and anyone willing to convert some home equity into cash would have got a good deal.
But the picture is not the same anymore. Prices have crashed by a third in many places, and even after foregoing a large chunk of your equity in your property, you are likely to get a much smaller amount of cash.
In many cases, the people who would be taking out these loans despite the lower payouts would be doing so out of desperation. The unemployment rate has climbed up rapidly in the last two years, and there are lots of people who are struggling to make ends meet. This gives some indication on which sectors will get a spending boost. It wouldn’t be a surprise if most of this money ends up going into buying necessary goods and not luxury items.
A large proportion of home equity loans could also end up going into repaying other debts that the homeowners may have accumulated. This could include high interest liabilities like credit card debts. Many other people would be funding important activities like children’s education or necessary refurbishment of the house through these loans.
If the housing markets show any signs of recovery, it would be great news for the economy and especially for home equity lenders. They would get a much better deal in return for their equity. With better payouts and more optimism, some of the money would also end up in other sectors of the economy, which will be good for GDP growth and even for employment.