The US economic trump card

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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.

The writer is chief executive of Meredith Whitney Advisory Group

Many investors are questioning the state of US consumers and their ability to continue to power the American economy in the wake of disappointing data on confidence levels and spending.

While high-end consumers are holding up overall spending, the bulk of households are clearly feeling the weight of cumulative inflation. Property insurance alone has jumped 61 per cent over the past five years. Last year, overall home ownership costs increased at more than twice the rate of inflation, according to data from Intercontinental Exchange.

This has been a big contributor to consumers’ negative outlook on inflation. However, the US economy has a proverbial ace up its sleeve that I believe will translate into a broadening of spending in 2025.

This is the fact that consumers have the potential to leverage big gains in the equity of their homes. The home loan burden on US households is the lowest it has been in nearly 40 years, with mortgage debt falling to a mere 24 per cent of home values, less than half the post-housing crisis level of 51 per cent. Homeowners have paid down their mortgages over the past 15 years and, in many cases, paid off their debt entirely. Some 40 per cent of homeowners own their homes free and clear.

However, recently something interesting has been happening. After shrinking for 17 years, growth in home equity lines of credit (or Helocs) turned positive in 2024 and is accelerating into 2025. Of the $35tn in homeowners’ equity outstanding, I estimate that more than $20tn could be tapped while still keeping homes conservatively levered. This includes more than $14tn of equity in homes without mortgages.

Of course, I expect nowhere near these levels to be tapped. But even if it is a fraction of that over the next few years, it would be massively stimulative to the US economy.

For example, as of the fourth quarter, Helocs totalled just under $400bn, roughly 2 per cent of tappable home equity. At its peak in the third quarter of 2009, home equity credit as a percentage of tappable equity was 11.4 per cent. Even a modest increase to 4 per cent over the next 18 months would put a further $400bn into the economy.

According to a Boston Consulting Group survey, 37 per cent of home equity borrowers use their proceeds on home renovations, so this would mean an incremental $148bn into home renovations. If the home equity credit level rose to 6 per cent that would drive $296bn into home renovations. To put this in context, Home Depot’s total 2024 revenues were $159bn.

Not only have major players such as JPMorgan and Wells Fargo exited the business entirely, but the large banks remaining in the business have pulled back. This is why the fact that Helocs began growing this summer, reversing the 17-year trend of decline, is such a big deal. What’s more, growth is picking up momentum.

Roughly $25bn of new home equity loans and lines of credit were drawn on in 2024, and I expect that will grow by at least two times in 2025. This may not sound like big numbers in the context of $18tn in total consumer debt, but it is the fastest-growing consumer debt product.

Most seniors — typically defined in the US as the over 65s — live on a fixed income and have been made vulnerable by the impact of cumulative inflation. Some 60 per cent of all US homes are owned by seniors who want to stay in their residences as they age. This could explain why more of them are opting to tap into a tax-advantaged, relatively low-cost home equity loan. Seniors account for 40 per cent of home equity lines of credit, up from 19 per cent in 2009.

Since 2019, equity in US homes has grown by $15tn as property values have risen and debt has been paid down. This could be a major source of liquidity for struggling households and would broaden the base of consumer spending. And the majority of home equity proceeds go directly back into the economy.

As half of the growth in Helocs is coming from outside the banking system, the market would scale much further if more banks were active in this area. Perhaps if regulatory capital rules change under the new Trump administration to free up home equity lending, banks will re-engage.