Reno tops nation for spike in homeowners borrowing against own house

Echoing shades of Reno’s bubble years, the Biggest Little City saw the largest spike in the country for homeowners borrowing against the equity of their house.

The Reno metro area saw an 80 percent increase — the largest among all metro areas surveyed — in home equity line of credit or HELOC originations during the third quarter of 2017, according to U.S. property research company ATTOM Data Solutions.

The numbers don’t come as a surprise, said Cory Henderson, a loan officer at Reno-based Mann Mortgage. Rising home prices mean fewer homeowners owe more on their mortgages than their house is worth.

“What’s pushed it is the appreciation of the last two years,” Henderson said. “The market is not nearly as underwater as it was three years ago and all that untapped equity is being accessed by homeowners, which is a trend that will continue this year.”

Tough crowd: Reno renters give city an F grade

A HELOC is a type of second mortgage that people can take based on how much equity they have in their house. Equity is essentially the difference between the value of a house and how much is owed on its mortgage, so it grows as a home appreciates in value. Unlike a regular home equity loan, which is paid out in one lump sum, a HELOC gives borrowers a line of credit that they can withdraw from when they need the money.

A key difference between a HELOC and a straightforward second mortgage is that borrowers do not have to pay interest on the loan unless they actually draw money from it.

Traditionally, HELOCs have been used as a rainy day fund, said Daren Blomquist, ATTOM Data Solutions senior vice president. During the heady days of Reno’s housing bubble, however, second mortgages also turned into a symbol of the era’s fast and loose lending climate. At the time, some homeowners used the easily acquired second mortgages to purchase big ticket items or speculate on real estate properties, with the latter further compounding the overheated market.

“HELOC usage is a potential red flag that you would definitely want to look at if you see it continue to jump at the level we saw (in the third quarter),” Blomquist said. “It could be a sign that people are starting to use their homes as ATMs again.”

Gaining equity

The increase in people borrowing against their houses in the Reno area marks a big departure from the recession. From 2009 to 2010, an estimated 27 percent of Reno-area homes had negative equity, according to data analytics firm CoreLogic. Having negative equity, also known as being “underwater,” means the value of a house is lower than the amount of its mortgage.

With the economy improving and companies such as Apple, Tesla and Switch coming to the Reno-Sparks metro area in recent years, however, the area has seen a huge surge in home values. Reno-Sparks ended 2017 with fewer than 100 existing single-family homes priced below $300,000 on the market, according to the Reno/Sparks Association of Realtors.

In July, the median price for an existing single-family house in Reno reached $387,250, breaking the all-time high of $380,000 set during the tail-end of the bubble years in January 2006. The median price has since gone down but is expected to resume its upward trajectory, especially with housing supply tightening. At the current rate of sales, the market has the equivalent of just 1.3 months of supply for existing single-family homes.

“New listings in December were down to less than 300 so inventory is going down,” said Doug McIntyre, Reno/Sparks Association of Realtors president. “Median prices are going to go up.”

Reno’s strong housing demand and tight supply are fueling a housing crunch not just for single family homes but apartments as well. Reno has consistently made several top lists for the fastest increase in rents in the nation during the last couple of years.

Rising home values are putting pressure on affordability, with the area’s median household income of about $55,000 unable to comfortably afford the Reno-Sparks median home price of $345,000.

For homeowners who saw the value of their homes tank during the recession, however, the sharp appreciation of the last couple of years is good news. This is especially true for those who bought at the height of the bubble, as it means they are finally getting back to equilibrium. For those who bought before the bubble or during the recession, it means getting that highly prized equity from their house. This rise in equity is fueling the spike in HELOC activity in Reno-Sparks.

Mann Mortgage’s Henderson says lenders especially like the lines of credit because they are less risky than a lump-sum home equity loan. Lenders, for example, can cancel a HELOC before all funds are drawn and tell borrowers they can’t make any more withdrawals from the account.

“It probably has something to do with banks being burned during the downturn,” Mann said. “Everything’s been a HELOC right now.”

A new bubble?

The rise in HELOC activity in Reno-Sparks also coincides with rising debt nationwide, said Brian Bonnenfant, project manager at the Center for Regional Studies at the University of Nevada, Reno.

“It matches with the record personal debt that we are seeing right now, which is going to continue as more people borrow using equity lines or credit cards,” Bonnenfant said. “It’s probably not very healthy but from a glass-half-full perspective, perhaps people are seeing longevity and increased confidence in their jobs and the economy.”

One difference from the overheated boom days is that the number of equity lines of credit opened is still far below what they were back then. Although Reno-Sparks’ 906 total originations for new home equity lines of credit is a big spike from the 504 seen in the third quarter of 2016, it is still about half of what it was back in 2006, Blomquist said.

Meanwhile, the more cavalier loan products that fueled the fast and loose flow of financing prior to the recession have yet to make a comeback. These include loans where people can just state their income without concrete proof to back up their claims.

“The total stated income loans with no income and no assets — those are not back in the market,” Henderson said.

Instead, the Reno market is seeing an increase in the last eight to 10 months of purchase money HELOC mortgages, where sellers help finance part of the loan for borrowers so they can afford a higher mortgage, Henderson said.

Interest rates also remain as the primary wildcard that could impact the housing market.

In addition to the potential for raising rates, the markets are also grappling with changes in a key metric traditionally used as a benchmark for mortgages. With plans to phase out out the London Interbank Offered Rate or LIBOR as a standard due to several banking scandals, there is uncertainty surrounding interest rates, Henderson added.

As long as Northern Nevada’s job market holds strong and financing guidelines do not revert back to the more creative standards seen in the previous boom years, the area should not be at risk for a similar bubble, Henderson said.

After ranking dead last in 2009 and 2010 in Gallup's Job Creation Index, Nevada has rebounded as one of the top states for job growth, including a first place ranking in 2016. Preliminary numbers from the Department of Employment, Training and Rehabilitation also show 3.1 percent job growth for 2017.

“The one good thing about our market is that the wild speculation hasn’t come back so you can’t get a non-owner-occupied investment property loan with no money down,” Henderson said. “The housing market and the jobs market always go hand in hand and, fortunately for us, the job market looks bright.”

Top 5 U.S. metros for HELOC increases

Here are the top five metropolitan statistical areas based on their percentage jump in number of new home equity lines of credit opened during the third quarter of 2017.

Reno, Nevada: 80 percent

Fort Wayne, Indiana: 74 percent

Peoria, Illinois: 46 percent

Bremerton, Washington: 45 percent

Dallas, Texas: 43 percent

Source: ATTOM Data Solutions