Homeowners are racking up record amounts of home equity, thanks to fast-rising values in today’s competitive housing market. No surprise, more people are now starting to tap that cash. What are they spending it on? Mostly making their homes even more valuable.
Renovation spending is soaring, and 80 percent of borrowers taking out home equity lines of credit say they would consider using that money to renovate, according to a survey released in December by TD Bank.
“We’re not only seeing more requests for proposals, but more committed projects from home owners,” said Steve Cunningham, a remodeler from Williamsburg, Virginia, in a report from the National Association of Home Builders. “In addition to regular updates and repairs, there’s been an uptick in more ambitious large remodel requests.”
Remodeling spending topped $152 billion in 2017, and renovations for owner-occupied single-family homes will increase 4.9 percent in 2018 over 2017, according to the NAHB. That does not include remodeling done by investors looking to flip or rent properties, both of which are increasing as well.
Suzanne Kreiter | The Boston Globe | Getty Images
A home improvement contractor works on a house in Cambridge, Massachusetts.
“Below-normal rates of home building are creating an aging housing stock,” said Paul Emrath, vice president of survey and housing policy research at the NAHB. “Factors inhibiting stronger growth include the ongoing labor shortage and rising material prices.”
An older housing stock, combined with not enough new homes being built, means more people will choose to renovate.
Homeowners are also using home equity cash for education expenses and to pay down other debt in order to lower monthly payments, but there is a new and increasingly popular use: taking the cash out to make more cash.
“Essentially there is a confidence from some homeowners in the overall market that indicates to them that they can generate a return on their money at a rate greater than the cost of borrowing it,” said Matthew Weaver, vice president of sales at Finance of America Mortgage.
He also said there is now a strong confidence among borrowers that home values will continue to rise, making it less likely that borrowing against their homes even more will not end up putting them underwater on their mortgages in the future.
For some that means investing in the stock market. For others it is buying more real estate. Rental demand is still very high, especially for single-family homes, and a new breed of rental management and investment company is making it much easier to become a landlord.
And of course, “Some are looking to profit from the popularity of cryptocurrencies such as bitcoin,” added Weaver.
In the near future, your home could be battery operated.
This is especially true if you live in New York, California, Massachusetts, Hawaii, Vermont, Arizona or a growing roster of other states and municipalities experimenting with revamping their electrical grids for the 21st century.
You might not even know your lights are being kept on by the same chemical process that powers your smartphone, since the batteries could be tucked into what looks like a neighborhood junction box, or behind a fence in a substation. But now, thanks to efforts by startups and the utility companies they sell to (and sometimes battle), you might get one right inside your home.
The rise of these home batteries isn’t just a product of our collective obsession with new tech. Their adoption is being driven by a powerful need, says Ravi Manghani, of GTM Research: renewable energy.
Without batteries and other means of energy storage, the ability of utility companies to deliver power could eventually be threatened.
Solar power, especially, tends to generate electricity only at certain times—and it’s rarely in sync with a home’s needs. In some states, such as California and Arizona, there’s an overabundance of solar power in the middle of the day during cool times of the year, then a sudden crash in the evenings, when people get home and energy use spikes.
For utilities, it’s a headache. The price of electricity on interstate markets can go negative at certain times, forcing them to dump excess electricity or pay others to take it.
“This is not a long-term theoretical issue that might happen—this is now,” says Marc Romito, director of customer technology at Arizona Public Service, the state’s largest electric utility.
There’s something ruggedly individualistic and inherently American about having batteries in your home. They’re good for keeping power going in a disaster, as customers of the two biggest firms by sales volume in this field, Sonnen and Tesla, demonstrated in the aftermath of Hurricane Irma. And in combination with rooftop solar panels, they free people from total dependence on the grid—a kind of energy cable-cutting that wonks call “grid defection.
The very real possibility of grid defection is changing the power dynamics between utilities and their customers.
Last week, real-estate developer Mandalay Homes announced a plan to build up to 4,000 ultra energy-efficient homes—including 2,900 in Prescott, Arizona—that will feature 8 kilowatt-hour batteries from German maker Sonnen. It could eventually be the biggest home energy-storage project in the U.S., says Blake Richetta, senior vice president at Sonnen.
The homes, which will come with the Sonnen battery preinstalled, will be part of a Sonnen-managed “virtual power plant for demand response” that could allow the houses to stabilize the grid, lower its carbon footprint and decrease peak load, says Mr. Richetta.
While the Mandalay Homes project is still in the blueprint stage, with only one test home built so far, this kind of radical, battery-enabled rethink of the grid is already happening in Vermont.
In partnership with Tesla Energy, Green Mountain Power is offering 2,000 of its customers the opportunity to have a Tesla Powerwall in their home for $15 a month. The 13.5 kilowatt-hour batteries retail for $5,500, but the utility can afford to put them in homes because they help the company save on other grid infrastructure, says Mary Powell, GMP’s chief executive and president. “Peaker plants,” for instance, are fired up only when the grid is strained to maximum capacity, saving the utility from using one of its most expensive forms of electricity.
GMP also uses batteries from Sonnen, SimpliPhi and Sunverge. Ms. Powell says the larger battle for home battery storage will be over how each of these companies—and dozens of others—differentiates itself, selling different size batteries adapted for different uses in homes, businesses and utilities.
Arizona Public Service’s Mr. Romito says not all of these batteries are created equal—though he wouldn’t name names.
The biggest challenge to home battery storage remains economics. Utilities’ current rate structures don’t charge most homeowners for using excess power, nor do they change the price based on time of day. For the overwhelming majority of homeowners, the payback on a solar power system with battery storage could take decades.
Batteries aren’t the only way to reduce the need for short-order energy, or so-called “demand response,” says Mr. Romito. Smart thermostats, managed by the utility company, can precool homes when solar power is at peak production, reducing load on the grid in the evening.
This cannot only be as useful as batteries in certain cases, it can be more cost effective. Other possibilities include remotely determining when electric vehicles charge and even shifting large industrial loads to different times of year.
In states where electricity is more affordable, it’s still early days for batteries in homes. But Mr. Romito says users and utilities will continue to move toward them with the inexorable addition of more and more renewables to the grid.
Mr. Manghani of GTM Research agrees. His battery storage adoption forecasts track closely with states and regions where renewable energy is being generated.
Falling prices also help. Battery pack prices have decreased, on average, 24% a year since 2010. Cheaper batteries shorten the resulting payback period, which in turn makes renewable energy more attractive to home owners. In 2016, solar grew faster than any other energy source, according to the International Energy Agency.
At the intersection of these and other trends is a simple fact: For the first time since the discovery of fire, the way humans get energy is set to fundamentally change.
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We’re living in expensive times—when a bottle of fresh juice can run you $5, rents and home prices are soaring, and the bills never seem to stop piling up. But aspiring homeowners might soon get a break as it becomes a little easier for those with student, credit card, and car loan debt to qualify for a mortgage.
Fannie Mae plans to increase its allowable debt-to-income ratio from 45% to 50% on July 29. This means that more borrowers on the cusp of getting a loan (e.g., millennial, first-time, and lower- to moderate-income borrowers carrying more debt) could potentially qualify for a mortgage backed by Fannie.
The debt-to-income ratio is calculated by taking a potential borrower’s monthly gross income and dividing it by the borrower’s recurring debts such as monthly car payments. Lenders use this ratio to figure out if borrowers can afford to make their mortgage payments each month.
Fannie made the change after analyzing years of data that looked at the ability of borrowers to make their monthly payments. After this analysis, Fannie can “more accurately predict the risk of default among potential borrowers,” and it determined that increasing the ratio “will enable more qualified borrowers to get a mortgage loan,” said spokesman Pete Bakel in a statement.
“They’re trying to make more loans available,” says mortgage loan originator Don Frommeyer of Marine Bank, in Indianapolis. “When interest rates go up, the debt ratios go up. And that limits the number of people who can buy a house.”
Fannie, which purchases and guarantees mortgages, was already granting ratios of up to 50% with certain conditions—such as if the borrowers had deeper cash reserves, underwent financial counseling, or had higher incomes. The change opens the door to borrowers with more debt who can’t meet those conditions.
Your bank might have its own debt-to-income ratios
However, not everyone will be benefit from the change. Fannie Mae insures mortgages, but it’s still banks, credit unions, and other financial entities that make the loans—and those lenders have their own criteria.
But the increased debt allowance could encourage more lenders to make changes to their debt-to-income ratios. And that could help more buyers on the brink.
“The best thing the consumer can do is ask the lender if they underwrite to Fannie Mae guidelines,” says longtime mortgage broker Jeff Lazerson,based in Laguna Niguel, CA. If they don’t, “you [might] just have to find another lender. Or maybe you push back on that lender” to see if it’ll raise the limits.
Lower debt-to-income ratios won’t help everyone
A higher debt ratio isn’t a silver bullet for loan seekers, though.
“Mortgage borrowers need to keep in mind, it’s the person’s whole application that will determine whether or not they get approved,” says Eric Tyson, co-author of “Mortgages for Dummies.”
“If you don’t have a good credit score, if you don’t have a sufficiently large down payment, it won’t change the outcome of your application.”
Buyers who can’t qualify, even with the higher ratios, should consider other alternatives.
“Most people are looking to buy at the high end of their budget. They want to qualify for as much house as they can get, partly because homes are so expensive to begin with,” says Lazerson, who is also a mortgage columnist.
“They could look for a smaller-sized property [with a] lower sales price. They could find a co-signer, someone who they trust, usually a family member or a close friend,” Lazerson says. “Or [they could] come up with more down payment money.”
The information is not guaranteed and a prospective buyer should verify information with the appropriate party. Windermere Stellar and MJ Steen Group assume no liability for any errors in this information.