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 fortunes as high mortgage rates weigh on home values, at least on paper, as the once-scorching housing market cools quickly.
Sales have been slowing for several months and mortgage rates are now double what they were earlier this year.
Home prices also fell 0.77% from June to July, according to a recent report by Black Knight, a software, data and analytics company. That might not sound like much, but it was the largest monthly decline since January 2011 and the first monthly decline of any size in 32 months.
“Annual home price growth was still over 14%, but in a market characterized by as much volatility and rapid change as today, such backward-looking metrics can be misleading as they can obscure more timely, pressing realities,” wrote Ben Graboske, President of Black Knight Data & Analytics.
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About 85% of major markets saw prices fall from the highs in July, with a third falling more than 1% and about one in 10 falling 4% or more. As a result, some homeowners, having accumulated trillions of dollars in home equity over the first two years of the pandemic, are now losing equity.
So-called vulnerable equity, which Black Knight defines as the amount a homeowner can borrow while retaining a 20% interest in the property, hit its 10th consecutive quarterly record high of $11.5 trillion in the second quarter of this year. However, data suggests it may have peaked in May.
Falling home values in June and July pushed total vulnerable equity down 5% and given the housing market’s slowdown since then, the third quarter of this year will show a more pronounced decline.
“Some of the nation’s stockiest markets have seen significant declines, particularly in key West Coast metropolitan areas,” Graboske noted.
From April to July, San Jose lost 20% of its available equity, followed by Seattle (-18%), San Diego (-14%), San Francisco (-14%) and Los Angeles (-10%).
Homeowners are still a lot snappier than they were last time the housing market underwent a major correction. During the subprime mortgage crash that began in 2007 and the Great Recession that followed, real estate values in some major markets collapsed by nearly half. Millions of borrowers went under with their mortgages and owed more than their homes were worth.
That is not the case today. On average, current borrowers owe only 42% of their home’s value on both their first and second mortgages. It is the lowest leverage on record. Some depreciation on paper shouldn’t affect these owners at all.
However, there are about 275,000 borrowers who would go under 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, marking the top of the market.
According to the report, even with an overall price decline of 15%, the negative return on equity would still be a long way from reaching the levels seen during the financial crisis.