Home-equity borrowing slows dramatically

After years of piling debt on their homes, Americans are becoming more cautious about using them as a piggy bank.

A cooling housing market and higher interest rates have made homeowners more reluctant to tap the equity they may have built up in their residences. The amount borrowers owe on their home-equity lines of credit has slipped in the past six months, to $561 billion at the end of March, the first such decline since 1999, according to new data from Equifax Inc. and Moody's Economy.com Inc. Although that decline was partly offset by a pickup in fixed-rate home-equity loans, total home-equity borrowing rose just 9 percent in the 12 months through March, well below the 21 percent average annual growth rate of the past five years.

"People are feeling uncertain about the value of their home and are feeling tapped out," says Doreen Woo Ho, president of Wells Fargo & Co.'s consumer-credit group.

Some homeowners have decided to "wait and see what happens to real estate," says David Rupp, Bank of America Corp.'s home-equity executive, "or they may view themselves as not needing to borrow."

During the housing boom, demand for home-equity lines of credit climbed sharply as property values rose, interest rates fell and lenders made it easy for borrowers to tap their equity for everything from home improvements to vacations. Borrowing against home equity freed up roughly $187 billion in cash per year between 2001 and 2005 that was used to pay off other debts and for new spending, according to a recent paper by former Federal Reserve Chairman Alan Greenspan and Fed economist James Kennedy.

Now, the slowdown in home-equity borrowing is leading to weaker sales in some markets for autos, building materials and electronics, says Mark Zandi, chief economist of Economy.com. The slowdown has been particularly notable in parts of the country that are suffering most from housing and mortgage corrections, including Boston, Minneapolis, Miami, Las Vegas and Washington.

Rising short-term interest rates have driven rates on home-equity lines of credit to an average of 8.7 percent, up from as little as 4.64 percent in April 2004, according to HSH Associates. Home-equity lines carry a variable rate, usually tied to the prime-lending rate, and give homeowners the right to borrow up to a certain amount, either all at once or over time.

Meanwhile, rates on home-equity loans, which provide borrowers with a fixed-rate and a lump sum, have also increased, but not as much as lines of credit. Home-equity loans average 8.1 percent, up from 6.75 percent since April 2004, HSH says.