Residential Magazine

As remodeling rebounds, homeowners look beyond HELOCs

By Jim Davis

Much like the U.S. construction industry as a whole, home remodelers watched demand disappear overnight immediately after the onset of the COVID-19 pandemic. And like other builders, home remodelers saw a strong and welcome rebound.

“We went from thinking the bottom had fallen out and the world was coming to an end to … having one of the busiest years that we’ve had in recent memory,” says Vince Butler, president of Butler Brothers, a northern Virginia-based homebuilder and remodeler.

The National Association of Home Builders (NAHB) surveyed remodelers in April 2020 after the pandemic struck and found that inquiries for renovations dried up. According to the survey, 97% of remodelers reported that homeowner inquiries about remodeling projects dropped in either a major or minor way. Another 86% reported that homeowners were reluctant to have remodeling crews in their homes.

A V-shaped recovery occurred soon after, says Paul Emrath, NAHB’s vice president of survey and housing policy research. The total amount spent on U.S. home-improvement projects increased 6% from 2019 to 2020 and is expected to increase another 4% this year, says Emrath, citing federal data and NAHB’s own forecast.

The ways in which homeowners finance these remodeling projects, however, look like they’re changing. Home equity lines of credit (HELOCs) and home equity loans declined as shares of loan originations and overall dollar volume last year compared to previous years, according to Attom Data Solutions. (A home equity loan is a fixed-rate product, while a HELOC offers a credit line with a variable rate.)

About 20% of all loan originations in 2018 were HELOCs or home equity loans, according to Attom Data. This share dropped to the mid-teens early last year, and by third-quarter 2020, only 7.5% of originations were for equity-based loans. During this same quarter, HELOCs and home equity loans accounted for about $50 billion of the loan origination market. These volumes totaled about $69 billion in Q3 2018 and $66 billion in Q3 2019.

When mortgage rates dropped below 3%, many consumers opted to pay for these projects by refinancing rather than choosing a HELOC or home equity loan, says Todd Teta, Attom Data’s chief product officer. HELOCs, which occupy a second-lien position, had rates of about 4.75% earlier this year.

“While our data doesn’t specifically identify what’s financed by the various kinds of home loans, it’s a good bet that cash-out mortgage refinancing is a more popular way these days to pay for home improvements than home equity credit lines because of a significant difference in loan rates,” Teta says.

It’s a good bet that cash-out mortgage refinancing is a more popular way these days to pay for home improvements.

Traditionally, HELOCs and home equity loans have been a way for homeowners to pay for renovations, says Marina Walsh, vice president of industry analysis for the Mortgage Bankers Association (MBA). She says that homeowners now have many other options to pay for these projects, including unsecured debt such as credit cards or personal loans. Since the pandemic, the savings rate in the U.S. has skyrocketed and many consumers haven’t been spending money on travel or restaurants. These people also may be funding home-improvement projects through their own savings, Walsh says.

She also thinks that some people may be reluctant to tap into their home equity. The MBA conducts an annual home equity lending study. It found that 27.4% of homeowners with a HELOC had no balance at the end of 2019, meaning that the homeowners had access to cash but weren’t using it and keeping it almost like an insurance policy.

“I do think [these products] could have a resurgence, especially with rates going up as high as they are potentially by the end of next year,” says Walsh, noting that homeowners had a record $20.4 trillion in home equity as of Q3 2020.

Remodelers, like the rest of the construction industry, are facing significant headwinds this year — namely the difficulty of finding workers and the costs of building materials. Emrath says that softwood lumber prices spiked to record highs. Butler, the Virginia builder who spoke at an NAHB market-forecast presentation this past February, says that his company has been waiting since May 2020 for some appliances. He also notes that the pandemic has resulted in some innovations. 

His company has come to love virtual home inspections and he hopes that various jurisdictions will continue to offer these even as the pandemic subsides. He also says that he has had only one in-person presentation since the pandemic began, instead reviewing projects via Zoom. This has cut down on “windshield time.”

“We were reluctant to push people to that virtual platform,” Butler says. “It just seemed impersonal and I think we all worried that we were going to lose something by doing that. And it’s turned out to be extremely efficient, both for the client and for us.” ●


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