A “For Sale” sign outside a house 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-hot housing market cools off quickly.
Sales have slowed for several months, with mortgage rates now doubling from earlier this year.
House prices, too, fell 0.77% from June to July, according to a recent report from Black Knight, a software, data, and analytics company. While that may not sound like much, it was the biggest monthly drop since January 2011 and the first monthly decline of any measure in 32 months.
“Annual house price appreciation still stands at over 14%, but in a market characterized by a lot of volatility and rapid change like today, such backward-looking metrics can be misleading because they can mask more current and pressing realities,” writes 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 down more than 1% and about one in 10 down 4% or more. As a result, after earning trillions of dollars in home equity collectively during the first two years of the pandemic, some homeowners are now losing equity.
The so-called tapped equity, which Black Knight defines as the amount a homeowner can borrow while maintaining a 20% equity stake in the property, hit a record 10th straight quarter in the second quarter of this year at $11.5 trillion. . But data suggests it may have peaked in May.
The drop in home values in June and July brought the total amount of equity that could be tapped down 5%, and given the weakness in the housing market since then, the third quarter of the year will see an even bigger decline.
“Some of the most equity-rich markets in the country have suffered significant setbacks, especially among the major West Coast metros,” Graboske said.
From April to July, San Jose lost 20% of its leveraged equity, followed by Seattle (-18%), San Diego (-14%), San Francisco (-14%) and Los Angeles (-10%).
Homeowners are still much flatter than the last time the housing market experienced a major correction. During the subprime mortgage crisis, which began in 2007, and the subsequent Great Recession, home values plunged by nearly half in several key markets. Millions of borrowers are drowning in their mortgages, for more than the value of their homes.
That didn’t happen today. Borrowers today, on average, owe only 42% of the value of their homes on their first and second mortgages. This is the lowest leverage on record. Losing some value on paper shouldn’t affect that owner at all.
However, there are approximately 275,000 borrowers who would sink if their homes lost 5% of their current value. More than 80% of those borrowers bought their homes in the first six months of the year, which is the top market.
Even with a universal 15% drop in prices, negative equity levels are far from the levels seen during the financial crisis, according to the report.