After the housing bubble burst and home values plummeted, Peter Anderson put his plan to open a landscaping business on hold. The value of his Phoenix home had been nearly cut in half from its peak, meaning the collateral he was going to borrow against to start his business was suddenly insufficient.
But over the past year the housing market has rebounded. His home is now worth about 20 percent more than it was in January 2012, which has allowed him to finally borrow enough money against it to get his business off the ground.
“It seemed hopeless at the time…” he said. “Thankfully things have turned around. “My house is worth more, so that means I am too, and banks are looking at me differently now.”
Anderson was not alone. As home prices fell, many prospective small business owners had trouble with securing a loan or taking out a home equity line of credit.
The Case-Shiller Home Price Index dropped from 206.65 in April 2006 to 136.77 in January 2012, leaving many with homes that were significantly devalued.
Anderson finally caught a break when home prices started to rise after bottoming out a year ago.
Nationally, the median single-family home price stands at $173,800, up 11.6 percent from a year ago, according to the National Association of Realtors.
As home values have started to rise, more small business owners are benefitting from greater access to credit.
“To many homeowners, we are seeing more loans, and loans of bigger size, which makes perfect sense,” said Harm Bandholz, chief U.S. economist at Unicredit Group. “Higher home prices mean that borrowers have more they can guarantee the loan with. Plus, the economy seems to be moving in the right direction, so that also gives the lenders an extra sense of security.”
In the fourth quarter of 2012, there were over 1.3 million more small business and farm loans of a million dollars or less made from FDIC-insured institutions to small businesses than there were during the same quarter the previous year, according to Federal Deposit Insurance Corporation.
Anderson says he would still be waiting for a loan if the Phoenix area home market had not bounced back so strongly. Though home values in the Phoenix area dropped 55 percent from 2006 to 2011, they have rebounded faster in the last year than any other city in the country, according to CoreLogic, a financial analytic firm.
The ease of access to credit has also enabled others to upgrade their businesses. William Parkerson, the owner of a contracting company in New York, can finally operate his business more efficiently. His bank significantly raised his home equity credit line, which means he now has access to a higher level of credit whenever he needs it.
“Now I can immediately replace things when they break,” he said. “Before if something expensive broke, I might have had to wait for a while.”
Some other small business owners are encouraged by the newfound credit.
“I went from having a home equity credit line that was too low to one that’s a lot higher than I need,” said Janet Wilson, who recently started designing and selling clothes in Charlotte. “I originally planned on a modest business, but if business is good, I’m going to take that money and expand into something more ambitious.”
Rising home prices have traditionally meant that homeowners spend more, which bodes well for the health of the economy. Owners have a tendency to spend three to five more cents than they otherwise would have for every dollar increase in home worth. This wealth effect could kick off a virtuous cycle, where the housing market spurs a more robust economy, which in turn would mean greater demand for housing. The end result would be higher credit limits for homeowners who want it.
“Banks are loosening lending standards for prime borrowers,” said Ryan Sweet, senior economist at Moody’s Analytics. “Better access to credit will help, which is one reason we see the housing market really doing well in 2013.”