Home Equity Lines of Credit and the Unemployment Rate – What Does the Evidence Say?

Abstract

A three-part explanation has emerged to explain the continued slow pace of the economic recovery. First, leading up to the 2006 financial crisis, consumers borrowed against their homes to finance purchases of consumer goods. Then, as the crisis unfolded, banks continued to lend to consumers even though home prices were falling. Finally, banks continued to lend as people lost their jobs. The recovery has been so meager, the story goes, because so many consumers have lost their main source of income and maxed-out their home equity borrowings. Thus, consumers have been forced to cut back on spending while banks are less able to continue lending. This paper argues that at least part of this story is purely anecdotal and, in fact, incorrect. In spite of the precipitous decline in home prices, the original price increases were so large that many homeowners still have adequate equity in their homes to borrow. The paper presents evidence that the average quarterly increase in aggregate HELOC lending after housing prices began their decline is, statistically, no different than the average quarterly increase in HELOC lending before housing prices began their downward trend. The evidence suggests that the increased HELOC lending during the recession is a continuation of a long-term trend that is not explained by higher unemployment during the recession.

Keywords: HELOC, Unemployment

JEL Classification: E44