Opinion: Is the time is ripe for a third way to tap home equity?

Homeownership is a bedrock for the American Dream, in no small part because it is also a durable, reliable long-term investment. The time-tested resiliency of home values highlights home equity’s importance to American households and its significance for residential real estate investors alike.

Yet, this type of wealth — often an individual’s largest single asset — too frequently remains illiquid. Homeowners are more “house-rich, cash-poor” than ever, with increasingly valuable homes, but less real income and higher borrowing costs to handle the challenges and opportunities of life.

In today’s environment, homeowners are looking for new answers — and financing platforms — to solve that puzzle. Alternatives to conventional financing are in demand, and in parallel, emerging players have created avenues for capital to join an efficient, rapidly-emerging, and fintech-driven asset class.

The convergence of homeowner requirements and investor incentives has resulted in a genuine inflection moment for home equity investments (HEIs). The call now lies in realizing its potential.

Are home equity investments the answer?

In simple terms, home equity investments offer homeowners a way to unlock equity without taking on monthly payments or additional debt. In return, they share a predetermined portion of their home’s future value. Investors pursue returns through HEI vehicles that pool these home equity shares, providing a scalable way to enjoy the benefits of U.S. home price appreciation, without the costs, inefficiencies, and complexity that historically come along with large-scale residential real estate investing.

That explains how HEIs have evolved from a niche idea to a budding market. Strong home equity is twice what it was following the Global Financial Crisis. It now represents over $30 trillion, and even conservative estimates of an addressable market for HEIs are in the hundreds of billions. And that growth potential puts HEIs on the brink of broader adoption as platforms bring this market together.

Why a third way?

It all begins with the state of play for homeowners. High inflation and increasing interest rates have significantly raised the costs associated with traditional second-lien products like home equity loans, lines of credit, and refinances.

As we approach double-digit borrowing costs, many homeowners hesitate to take on new monthly payments that could become unmanageable if the economy further slows, especially after many have already refinanced. Lenders, too, have pulled back given the cost of capital, which creates a growing segment of underserved homeowners — often including small business owners and individuals with nontraditional income — who nevertheless have solid personal balance sheets and substantial home equity.

The same story holds true for personal finance. Total household credit card debt has recently exceeded $1 trillion, with nearly half of cardholders maintaining balances despite an average APR of approximately 27.9% on card accounts as of April 3, 2024. Given all of these circumstances, it is understandable that homeowners are looking to their homes as an asset and seeking stress-free ways to leverage their equity to pursue their financial or life goals without the stress of a sale or new debt.

Proven attributes

From an investment perspective, HEIs are no longer esoteric, but instead a growing and proven asset class. Amid the market turbulence of the past 18 months, HEI and other asset-based investment vehicles stood out as strong performers. HEIs outpaced core assets such as equities while still providing stability through diversification and structured downside protection.

What results is a risk premium and Sharpe ratios (a method for measuring risk-adjusted returns) that stand up well to other asset-backed investments. In addition, historically, these returns have not been correlated to fluctuations in other asset classes, such as equities. During periods of high inflation and volatility, HEI vehicles provide exposure to residential real estate values without occupancy and rent payment risks, or the cost of property management and direct ownership.

Investors have taken notice, and trust in HEIs is growing. Diverse allocation from several investor segments — including insurance capital, institutional credit and alternatives managers, asset-backed buyers and lenders, and family offices — all demonstrate the maturity of this model. HEI vehicles can include traditional funds for accredited investors, institutional joint ventures, and forward-flow agreements. Additionally, sophisticated capital market solutions have emerged, inclusive of warehouse credit facilities, asset ratings, bi-lateral debt financings, syndicated securitizations, and secondary sales.

Seizing the moment

To keep the momentum, HEI operators must demonstrate adaptability, focus, and innovative approaches to attracting capital – ultimately reducing its cost and delivering even more value to homeowners. As more investors explore this space, HEI platforms are evaluated across several key criteria, including: homeowner centricity, servicing expertise, product structure innovation, portfolio integrity, and dedication to regulatory compliance.

Additionally, HEI platforms must offer innovative product structures that set them apart in the market. With features such as built-in risk mitigation mechanisms and flexible investment options, these platforms cater to the diverse needs and preferences of investors, providing unique opportunities for a diverse range of investors to participate in the HEI space.

Finally, these operators prioritize adhering to a steadfast ethos of regulatory compliance, ensuring that all aspects of their operations align with industry regulations and standards. The authenticity lies in the details; some HEIs, for instance, cap the percentage of home price appreciation paid back at settlement, demonstrating dedication to equitably fulfilling the interests of both homeowners and investors. Good operators will also go above and beyond what is legally required, recognizing that at the end of the day this is about helping people, not creating assets.

Not if, but how big?

In today’s environment, it is imperative that the investment community support new ways to make home equity an asset Americans can leverage to fund their goals. HEIs’ structured exposure, unique attributes, and long-term viability make them more compelling than ever as a vehicle for capital to help fulfill that promise — and benefit from a new asset class along the way.

The question is not whether HEIs will enter the mainstream, but rather how far and fast this asset class will expand. As the HEI market expands, it provides investors with an additional on-ramp into residential real estate. At the same time, HEIs benefit homeowners by making homeownership more accessible and less stressful, and allows them to capitalize on the value of their home without needing to sell or take on more monthly payments. 

Jeffrey Glass, CEO and Cofounder at Hometap Equity Partners.

This column does not necessarily reflect the opinion of HousingWire’s editorial department and its owners.

To contact the author of this story:
Jeffrey Glass at [email protected]

To contact the editor responsible for this story:
Tracey Velt at [email protected]