A “For Sale” sign outside a home in Albany, California, on Tuesday, May 31, 2022.
David Paul Morris | Bloomberg | Getty Images
Some homeowners are losing wealth as high mortgage rates weigh on home values, at least on paper, as the once-quick housing market cools.
Sales have been slowing for several months, with mortgage rates now double what they were at the start of the year.
Home prices, similarly, fell 0.77% from June to July, according to a recent report from Black Knight, a software, data and analytics firm. While that may not sound like much, it was the biggest monthly decline since January 2011 and the first monthly decline of any size in 32 months.
“Year-on-year house price appreciation was still over 14%, but in a market characterized by as much volatility and rapid change as today’s, these lagging metrics can be misleading as they can mask more current realities and urgent,” wrote Ben Graboske. , president of Black Knight Data & Analytics.
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About 85% of major markets have seen prices fall from peaks through July, with a third falling by more than 1% and about one in 10 falling by 4% or more. As a result, after having collectively gained trillions of dollars in home values during the first two years of the pandemic, some homeowners are now losing equity.
So-called equity, which Black Knight defines as the amount a homeowner can borrow while maintaining a 20% equity stake in the property, hit its 10th consecutive quarterly record high in the second quarter of this year in 11.5 trillion dollars. But data suggests it may have peaked in May.
Falling home values in June and July saw the total amount of exploitable equity fall by 5%, and given the weakening housing market since then, the third quarter of this year will show a further decline important
“Some of the most stock-rich markets in the country have seen significant pullbacks, particularly among major West Coast metros,” Graboske noted.
From April to July, San Jose lost 20% of its exploitable capital, followed by Seattle (-18%), San Diego (-14%), San Francisco (-14%) and Los Angeles (-10%) .
Homeowners are still much more aligned than they were the last time the housing market went through a major correction. During the subprime mortgage meltdown that began in 2007 and the subsequent Great Recession, home values nearly halved in some major markets. Millions of borrowers defaulted on their mortgages, owing more than their homes were worth.
This is not the case today. Today’s borrowers, on average, owe only 42% of their home’s value on both first and second mortgages. It is the lowest leverage ever recorded. Losing some value on paper shouldn’t affect these owners at all.
There are, however, about 275,000 borrowers who would go underwater if their homes lost 5% of their current value. More than 80% of these borrowers bought their homes in the first six months of this year, which was the first place in the market.
Even with a universal 15% drop in prices, negative variable income rates would still be nowhere near the levels seen during the financial crisis, the report said.