Americans have long borrowed against the ownership stakes in their homes to buy cars, build decks and renovate houses. That borrowing helped accelerate consumer spending, the U.S. economy’s primary fuel – until the housing bust struck a decade ago and shrank home prices.
But prices have recovered, and housing equity now equals 58 percent of home values–the highest point since 2006. Yet borrowing against that equity has barely budged from post-recession lows, which helps explain why consumer spending remains weak eight years after the Great Recession ended.
On Friday, the government is expected to estimate that the economy grew at an annual rate below 1 percent in the January-March quarter, thanks in large part to anemic spending.
The main problem, according to consumer surveys and banking analysts, is that despite low interest rates, it’s become harder to borrow. The web of lending regulations that was tightened after the financial crisis has yet to be eased. Many households would like to borrow more through home equity credit lines or cash-outs from loan refinancings. But having been burned by defaults during the financial crisis, banks are demanding nearly pristine credit.
“It’s harder to do a cash-out refinancing or get a home equity line of credit than it used to be,” said Karen Dynan, who was a chief economist at the Treasury Department in the Obama administration. “That has dampened the housing wealth effect”–the tendency of households to spend more when home values rise.
Johnson, 54, had hoped to spend $30,000 on the renovation. It would have meant building a music studio and adding wheelchair ramps and other modifications for her husband, a disabled veteran. That project is now on hold.
Americans do carry slightly more overall debt than before the recession, according to data from the Federal Reserve Bank of New York. But that’s mainly because of huge increases in student loans. By contrast, the kind of debt that fuels consumption – credit card borrowing as well as housing debt – remains well-below pre-recession peaks.
Research from the New York Fed suggests that if home-equity-related borrowing were to regain healthier levels – dating to the early 2000s, before the housing bubble – the economy could accelerate by three-quarters of a percentage point a year.
Stricter lending rules aren’t the only factor restraining borrowing. Younger and less affluent Americans are less likely than before the recession to own a home, for example, or to have much equity to borrow against if they do own. These are people who have historically been most inclined to borrow and spend.
Older, wealthier homeowners now own a larger share of America’s housing wealth. Yet at their age, they’re less likely to borrow for big purchases or projects.
Partly as a result, Americans have increased spending an average of just 2.3 percent a year since 2009, when the recession ended, just two-thirds of the historical norm. Because consumer spending drives about 70 percent of the economy, that weaker pace has hobbled growth.
The economy hasn’t grown 3 percent or more – its long-term norm – for a full year since 2005. Other factors are also slowing the economy, like retirements by the vast generation of baby boomers. But weak consumer spending is a significant drag.
“The previous behavior of using housing debt to finance other kinds of consumption seems to have completely disappeared,” William Dudley, president of the New York Fed, said in a speech earlier this year. “People are apparently leaving the wealth generated by rising home prices ‘locked up’ in their homes.”
Americans borrowed an average of $181 billion annually against homes from 2000 through 2003, before the reckless borrowing of the housing bubble, New York Fed economists found. But from 2012 through 2015, as housing recovered, they borrowed just $21 billion annually on average.
Banks now must hold more money in reserve for each home equity credit line they extend. It now requires an average credit score of 780 to get a home equity loan, up from 730 before the housing bust, the New York Fed estimates. Barely 30 percent of households have scores that high.
“There’s been a really striking shift, with a whole class of scores that are no longer getting loans,” said Bill Nelson, deputy chief economist at The Clearing House, a banking trade group.