Despite Ballooning Home Equity, Consumers’ Interest in HELOCs and Big-Ticket Purchases Is Soft and Getting Softer
New research from Bank of America suggests that U.S, consumers are battening down the hatches, husbanding their windfalls in home equity, focusing their borrowing on debt consolidation, and pulling back on major expenditures.
By David Evans, Chief Content Officer
The report: October 2024 Consumer Checkpoint
Source: Bank of America Institute
Why we picked this report: The cliché has it that the consumer is the resilient engine of the US economy. Any shift in their activity will have far reaching effects for retail banking, and aligning banking products and services with their changing priorities will be key to near-term growth.
Executive Summary
Bank of America’s October 2024 Consumer Checkpoint report pinpoints several emerging trends in consumer spending. While homeowners currently possess historically high levels of home equity, its impact on spending may be limited due to uneven distribution and debt consolidation trends. And while spending on durable goods remains robust, there is a discernable shift towards value categories and experiences over big-ticket purchases.
Key Takeaways
- Consumer spending shows modest forward momentum, with a 0.6% month-over-month increase in September.
- Home equity levels are at their highest since the 1950s, but its impact on spending may be limited.
- HELOC utilization rates have declined significantly post-pandemic but have recently stabilized.
What we liked about this report: It addresses the vexing question about why historically high levels of home equity – and by extension, household wealth – are not fueling more robust consumer spending, particularly on durable goods.
What we didn’t: Nothing.
Consumer Spending Trends
Consumer spending continues to show modest forward momentum, despite some fluctuations. Bank of America aggregated credit and debit card spending per household decreased by 0.9% year-over-year in September, following a 0.9% rise in August. However, seasonally adjusted spending rose 0.6% month-over-month in September, indicating underlying strength.
Services spending growth remains persistent, while retail spending shows no clear direction. This suggests that consumers are prioritizing experiences over goods.
Wage growth continues to support consumer spending, particularly among lower-income groups. In September, lower-income wage growth remained strongest at 3.5% year-over-year. This presents an opportunity for retail banks to tailor products and services to this segment, potentially focusing on savings and investment products that can help build long-term financial stability.
Record Home Equity Is (Not Yet) Driving Consumer Spending
Homeowners currently have a historically large share of equity in their homes, with levels at their highest since the 1950s. This presents a potential upside for spending if homeowners tap into this equity through home equity lines of credit (HELOCs).
However, retail banking executives should be cautious about overestimating the impact on consumer spending for several reasons:
Uneven distribution: Nearly 60% of home equity is held by the top income quintile of households. These higher-income and often older households may have a lower propensity to consume, focusing instead on saving and investing. This concentration limits the potential broad-based impact on consumer spending.
Debt consolidation: A significant portion of HELOC borrowing appears to be associated with debt consolidation rather than new spending. Through June 2024, Bank of America internal payments data suggests that estimated debt repayments have made up nearly a quarter of HELOC-funded spending. While this benefits the households affected by reducing their debt burden, it means that not all HELOC borrowing translates directly into increased consumer spending.
Low utilization: HELOC utilization rates have dropped significantly post-pandemic and remain well below the 2014-2019 average. This suggests that even though equity is available, homeowners are hesitant to tap into it. The decline in HELOC utilization appears to have flattened out recently, but it’s still far from pre-pandemic levels.
Historical context: Total HELOC borrowing as a percent of all U.S. consumer spending has stabilized in the past three years but remains a very small proportion of overall consumer spending, especially compared to the early 2000s.
For retail banks, these factors suggest several strategic opportunities:
- Targeted education: Develop programs to educate homeowners about responsible ways to leverage their home equity. This could include seminars, online resources, or one-on-one consultations with financial advisors.
- Innovative HELOC products: Create HELOC products that address current consumer hesitations. For example, offering more flexible terms, lower interest rates for specific uses (like home improvements that increase property value), or bundling HELOCs with financial planning services.
- Focus on debt consolidation: Given the significant use of HELOCs for debt consolidation, banks could develop specialized HELOC products or marketing campaigns focused on this use case, potentially bundling them with financial wellness programs.
- Segment-specific strategies: Given the concentration of home equity among higher-income households, develop tailored strategies for this segment that align with their financial goals, such as investment-linked HELOC products.
The Shift Away from Consumer Durables Spending
While overall durable goods spending remains robust, with Q2 2024 spending up by an annualized rate of 5.4% and 2.6% higher year-over-year according to Bureau of Economic Analysis data, there are signs of a shift in consumer behavior that retail banking executives should be aware of:
Consumer sentiment: The University of Michigan Survey shows that more households think it’s a ‘bad’ time to buy household goods than those who think it’s a ‘good’ time. This negative sentiment could be a leading indicator of future spending patterns.
Price impact: While prices of consumer durables have been falling for almost two years, they are still up over 8% on 2019 levels as of Q2 2024. This lingering inflation impact may be influencing consumer decisions.
Shift to value: Bank of America internal data shows evidence that households have pulled back on the share of durables transactions that are ‘high value.’ This suggests consumers may be making a conscious decision to rein in relatively expensive durable purchases, possibly as they skew their spending towards more ‘value’ products.
These trends present several implications and opportunities for retail banking:
- Lending strategies: Adjust lending criteria and product offerings to align with the shift towards value purchases. This might include offering more attractive terms for lower-value loans or developing specific financing options for ‘value’ categories of durable goods.
- Credit card offerings: Capitalize on the trend towards experiences by enhancing rewards programs for travel, dining, and other experiential categories. Consider partnering with airlines, restaurant chains, or entertainment venues to offer exclusive benefits.
- Financial planning tools: Develop and promote budgeting and financial planning tools that help consumers balance their spending between durables and experiences, positioning your bank as a partner in achieving their lifestyle goals.
- Small business focus: Given the shift in consumer behavior, consider how this might impact small businesses in your service area. Develop targeted lending or advisory services to help small businesses adapt to these changing consumer preferences.
- Data analytics investment: Leverage transaction data to gain deeper insights into these evolving spending patterns. Use these insights to inform product development, marketing strategies, and risk assessment models.
Editor’s note: This article was prepared with AI language software and edited for clarity and accuracy by The Financial Brand editorial team.
