Home equity could be a $35 trillion lifeline for Americans if recession strikes. Here's what to know.

• Consumer sentiment is declining amid macroeconomic uncertainty.
• Concerns are rising about the health of the US economy, but homeowners could boost spending.
• Tapping just a fraction of available home equity could be a massive stimulant, one analyst says.

Consumer confidence is teetering, but if a recession ultimately strikes, US homeowners are holding onto an under-the-radar lifeline.

Household consumption has been the backbone of the robust US economy in recent years, but the outlook is becoming murkier. Fading labor strength and new inflation risks are weighing on US shoppers, raising doubts over whether Americans can keep the economy humming along.

Luckily, years of rapidly appreciating home prices since the pandemic have created a reserve of strength that could continue supporting US consumers.

What's a HELOC?

According to data from the Federal Reserve, American homeowners were sitting on $35 trillion of home equity at the end of last year. Meredith Whitney, an analyst who's been called "the Oracle of Wall Street," says tapping that could be a huge boon for the economy.

"Of the $35tn in homeowners' equity outstanding, I estimate that more than $20tn could be tapped while still keeping homes conservatively levered," Whitney wrote in a piece for The Financial Times.

Homeowners can tap into a home equity line of credit, or HELOC. The option is available to homeowners who hold equity in their home — meaning that the amount owed on the mortgage is less than the property's value. Users can typically borrow up to 85% of a home's value through a lender, minus any amount still owed.

Once qualified, a HELOC functions similarly to a credit card. Borrowers receive a card or checkbook that they can use across the "draw" period, which usually lasts 10 years.

HELOCs can help pay off high debt obligations elsewhere, such as on credit cards or auto loans. Borrowers often use them to fund renovations that can boost a home's value. They can also provide tax benefits and help finance rising education costs.

But there are risks to be mindful of.

"If you don't repay it, then that could bring a risk to ultimately your shelter," Matt Vernon, head of consumer lending at Bank of America, told Business Insider. After all, a borrower is using their home as collateral, and failure to repay could mean foreclosure.

Meanwhile, HELOCs come with variable interest rates. As the economy shifts, this could lead to a big jump in payments down the road as rates fluctuate.

Vibecession or recession?

Ultimately, today's high interest rates are why EY chief economist Gregory Daco is unsure whether HELOCs will be a meaningful stimulant if the economy suddenly cools.

"In the type of high interest rate environment that we're in and likely to stay in, at least in the near term, I don't really see much boost there," he told BI. "It all depends on what the use of it is, and whether whoever is using those lines can manage and withstand the cost of that debt."

While Vernon acknowledged that it's plausible for HELOCs to boost consumers and the economy, it remains to be seen whether there will be a real need.

Declining consumer sentiment data has made Wall Street antsy about a recession, but Daco thinks this has been exacerbated by tremendous policy uncertainty. Positive consumer fundamentals can still be found.

"I think we should stray away from excessive pessimism," he told BI. For its part, EY sees the odds of a recession at around 40%.

In addition the the vast pool of home equity available to many borrowers, there are other pillars of support for the economy in the event of a recession.

"There is still a degree of savings that is beyond what was in accounts pre-pandemic that clients could tap into to continue to spend, and it would not be unhealthy to see that ultimately come back down to pre-pandemic," Vernon said.

Meanwhile, analysts at Mizuho pointed to aging Americans as another important support for the economy and the market, with the cohort predicted to grow spending by $1 trillion over the next five years.