Homeowners are sitting on a record amount of home equity, yet with mortgage rates near a three-year high, moving to a new home is often unaffordable. Some choose to renovate instead, but home equity loans and lines of credit are also becoming prohibitively costly. In the second quarter of 2026, homeowners originated nearly 20 percent more second mortgages and HELOCs compared with the first quarter, but experts say the borrowed funds are increasingly used to cover everyday expenses rather than improvements.
"As rates keep rising, tapping into home equity will become more and more expensive for homeowners. This will generally hold back consumer spending, but it will hit big-ticket items, like home renovations, particularly hard," said Tom Graff, chief investment officer of Facet.
The dynamic is partly a deliberate result of Federal Reserve policy. Graff noted that the Fed is raising rates to control inflation, and one intended mechanism is reducing consumer spending. However, the approach carries risks for a consumption-driven economy. "Consumer spending is already lagging way behind as a driver of GDP growth," he said.
Other headwinds include a softening jobs market, declining wage growth, elevated gasoline and diesel prices, and net negative immigration. The main driver of current GDP growth, Graff said, is spending on data centers. "If that were to slow even mildly, the economy ..." the thought unfinished, pointing to the fragility of the recovery.