A series of “negative credit shocks,” coupled with high interest rates, is blocking millions of American homeowners from accessing their home equity, according to a recent study by Point.
Researchers at the home equity investment platform found that 4.6 million out of roughly 52 million homeowners with a mortgage in the U.S. experience a labor market shift in any given year—be it a job loss, pay cut, or switch to being self-employed—usually associated with a credit score drop.
This is making it harder, if not impossible, for them to access the “safe haven” represented by their home equity via traditional loans, Point economist Aaron Terrazas told Newsweek.
Why It Matters
Home equity has long represented a crucial source of funding for American homeowners, who have traditionally tapped into it to finance home renovations, pay off interest debt, cover higher education and business ventures, and meet the growing cost of assisted living and healthcare.
With home values skyrocketing over the past five years, American homeowners had accumulated $34.7 trillion in home equity in 2024. But uncertainty around the U.S. economy and growing fears of widespread job losses this year are threatening homeowner’s ability to access “America’s piggy bank.”
What To Know
For most Americans, home equity is their largest single source of personal wealth, Terrazas told Newsweek—a golden pot they can tap for cash when needed.
“It is both a safe haven, and a safety net comprising about half of total net worth for the typical American homeowner and two-thirds of total net worth for Black and Hispanic homeowners,” he explained.
Thanks to the rise in home prices since the outbreak of the COVID-19 pandemic, homeowners in the U.S.—those who were not squeezed out of the market entirely by these same increases—are now sitting on an all-time high $34.7 trillion in home equity.
Andrew Lichtenstein/Corbis via Getty Images
While high borrowing costs make it hard for homeowners to tap their equity for cash, when they are able to, it is worth the price.
“When they are able to access these accumulated savings, they typically use it for major investments like home renovations, higher education, and small business ventures,” Terrazas said. “Another common use is paying off other higher interest rate debt, such as student loans, medical debt, or credit cards.”
But with an estimated one in 11 homeowners with a mortgage experiencing a labor market shock each year, according to Point, millions are likely facing declines in their credit score or income which are stopping them from accessing their equity.
What Is Causing These ‘Negative Credit Shocks’?
What Point’s study refers to as “negative credit shocks” are sudden drops in people’s credit scores following “periods of extended unemployment, self-employment or declines in earnings,” Terrazas explained, which “are often associated with a decline in credit scores because they lead to higher debt utilization.”
According to the Point study, about 1.5 percent of homeowners with a mortgage become unemployed in a typical year, while 6.4 percent experience a decline in their earnings, and 1.9 percent become self-employed.
That means that more than 9 percent of homeowners with a mortgage every year are exposed to a drop in their credit scores.
Home equity lines of credit or loans require very high credit scores—higher than required for conventional mortgages—and recurring, documented income.
“That means that even if a homeowner has accumulated substantial equity, they often can’t tap that equity to cover expenses during unemployment or during the early stages of a new business venture,” Terrazas said. “Conventional tools to access home equity aren’t available when many homeowners need them most.”
Are These Shocks Becoming More Frequent?
“The American economy is at a moment of transition and risk—both cyclically and structurally,” Terrazas said.
“A recent wave of federal government and technology sector layoffs, combined with the reality that interest rates in the U.S. are poised to remain higher for longer as inflation has proven stubbornly persistent mean that many Americans who had become accustomed to employment stability and suddenly experiencing labor market shocks,” he explained.
Unemployment figures in the U.S. rose in March, in part due to the staffing cuts across several federal government agencies called for by Elon Musk‘s Department of Government Efficiency (DOGE), and concerns over the impact of President Donald Trump‘s tariffs which are feeding fears of a looming recession.
On top of that, the nature of the modern job market has already impacted workers’ credit scores negatively.
“‘Jungle gym’ careers—the idea that career paths are no longer linear upward, but now often imply a range of periodic horizontal and often downward moves—have become both more common and more accepted in the gig economy,” Terrazas said.
Sideward and downward career transitions, why they can be justified by a worker’s personal choices toward a more equilibrated work-life balance, are often associated with credit score drops.
Can Homeowners Still Rely On Their Equity for Liquidity?
With home price growth expected to slow down this year, but not to reverse, American homeowners are expected to continue sitting on a pile of gold—even if the U.S. economy heads toward a recession.
But accessing their equity is not as convenient as it used to be a few years ago. “Conventional home refinances just don’t make sense for the broad swathe of homeowners right now,” Terrazas said.
“Interest rates have come down slightly over the past year—but they are still too high for homeowners who purchased in the 2010s to refinance because it would imply a big increase in their monthly payment, and they are not yet low enough for a refinance to make financial sense for homeowners who purchased at last year’s peak.”
“Higher interest rates make it less appealing to take advantage of your equity, simply because it costs more to do so,” LendingTree chief consumer finance analyst, Matt Schulz, told Newsweek. “However, home equity loan and HELOC [home equity line of credit] rates are typically still far lower than those found with credit cards, for example, making these loans a strong possible option.”