Homeowners are sitting on $5.4 trillion in ready cash, the most ever

Rising home values are making homeowners richer, a lot richer. Whether they choose to use it or not, the amount of equity today's homeowners are able to tap is at the highest level on record, according to a new report from Black Knight.

Over the course of 2017, the amount of money a borrower can take out of a home while still leaving 20 percent in it, which is what most lenders require, rose by $735 billion, the largest annual increase by dollar value on record. The brought the collective amount of so-called tappable equity to $5.4 trillion, which is 10 percent more than at the pre-recession peak in 2005.

Unlike during the last peak, homeowners today are far more conservative and lenders are stricter. Last year, even with record equity, homeowners took out only $262 billion via cash-out refinances or home equity lines of credit, or HELOCs. While that is another post-recession peak in dollars, it is less than 1.25 percent of all available equity, a four-year low.

More than half of borrowers who withdrew equity last year used cash-out refinances, thanks to near record-low interest rates. That is likely to change this year, given higher rates. Three-quarters of borrowers today with tappable equity have interest rates lower than the current rate, so will likely used second loans, HELOCs, instead.

"While rising rates tend to dampen utilization of equity in general, the market is poised for a strong shift toward HELOCs, as they allow borrowers to take advantage of growing equity while holding on to historically low first-lien interest rates," said Ben Graboske, executive vice president of Black Knight Data & Analytics. "Over half of all tappable equity – approximately $2.8 trillion – is held by borrowers with credit scores of 760 or higher and first-lien interest rates below today's prevailing rate, which creates a large pocket of low-risk HELOC candidates."

As with everything in real estate, the amount of homeowner equity varies dramatically depending on location. It is highly concentrated in the high-priced state of California. In fact, 39 percent of the nation's total tappable equity is there. Seattle and Las Vegas, which have seen huge home price jumps, have seen big equity increases as well.

While borrowers tend to use home equity for a variety of purposes, including paying down debt and education expenses, the primary use is for home improvement. This is more true now than ever, as the critical shortage of homes for sale has more owners staying in their houses longer and choosing to renovate rather than upgrade to another home. The average homeowner now stays in their home for 10 years, an all-time high, according to the National Association of Realtors.

Homebuying optimism overall is at its lowest level in two years, according to the NAR, especially among first-time buyers who can afford less. Today's homeowners are feeling more optimistic about selling, although the number of listings are still down double digits from a year ago.

"There's no question that a majority of homeowners have amassed considerable equity gains since the downturn. Home prices have grown a cumulative 48 percent since 2011 and are up 5.9 percent through the first two months of this year," said Lawrence Yun, chief economist for the NAR. "Supply conditions would improve measurably, and ultimately lead to more sales, if a growing number of homeowners finally decide that this spring is the time to list their home for sale."

That has yet to happen, and instead, projections for home remodeling are rising. Homeowner spending on remodeling and repair will approach $340 billion this year, an increase of 7.5 percent over last year, according to Harvard's Joint Center for Housing Studies' Leading Indicator of Remodeling Activity.

"Despite continuing challenges of low for-sale housing inventories and contractor labor availability, 2018 could post the strongest gains for home remodeling in more than a decade," said Abbe Will, research associate in the Remodeling Futures Program at the joint center. "Annual growth rates have not exceeded 6.8 percent since early 2007, before the Great Recession hit.

That could mean big gains for home improvement retailers like Home Depot, Lowe's and Masco.