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 quickly cools. Sales have been slowing for several months, with mortgage rates now double what they were at the start of this year. Home prices also 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 as volatile and rapidly changing as today’s, such backward-looking metrics can be misleading as they can mask more current, pressing realities ,” wrote Ben Graboske. , president of Black Knight Data & Analytics.
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About 85% of major markets have seen prices surpass their peaks through July, with a third down more than 1% and about one in 10 down 4% or more. As a result, after collectively gaining trillions of dollars in home equity during the first two years of the pandemic, some homeowners are now losing equity. So-called tappable equity, which Black Knight defines as the amount a homeowner can borrow while retaining a 20% stake in the property, hit its 10th consecutive quarterly record high in the second quarter of this year at $11.5 trillion. However, data suggests it may have peaked in May. The fall in home values in June and July took the total amount of usable equity below 5%, and given the weakening of the housing market since then, the third quarter of this year will see a more significant decline. “Some of the nation’s most equity-rich markets have seen significant declines, particularly among key West Coast metros,” Graboske noted. From April to July, San Jose lost 20% of its usable equity, followed by Seattle (-18%), San Diego (-14%), San Francisco (-14%) and Los Angels (-10%). Homeowners are still much more bullish 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 went underwater on their mortgages, owing more than their homes were worth. This is not the case today. Current borrowers, on average, owe just 42% of their home’s value on both first and second mortgages. It is the lowest leverage ever recorded. The loss of some paper value should not affect these owners at all. There are, however, about 275,000 borrowers who would be 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 peak of the market. Even with a 15% across-the-board drop in prices, negative equity rates would still be nowhere near the levels seen during the financial crisis, according to the report.
