As the once-hot housing market cools, some homeowners are losing wealth as high mortgage rates weigh on home values, at least on paper. Sales have been slowing for several months, and mortgage rates are now more than double what they were at the beginning of the year. According to data, tappable home equity may have peaked in May. As the once-hot housing market cools quickly, some homeowners are losing wealth as high mortgage rates weigh on home values, at least on paper. Sales have been slowing for several months, and mortgage rates are now more than double what they were at the beginning of the year.
According to a recent report from Black Knight, a software, data, and analytics company, home prices fell 0.77% from June to July. While this may not seem like much, it was the largest monthly drop since January 2011 and the first of any size in 32 months.
“Annual home price appreciation remained at more than 14%, but in a market characterized by as much volatility and rapid change as today’s, such backward-looking metrics can be misleading because they can mask more current, pressing realities,” wrote Ben Graboske, president of Black Knight Data & Analytics. Approximately 85% of major markets have seen prices fall from their peaks through July, with one-third falling by more than 1% and one-tenth falling by 4% or more. As a result, after collectively gaining trillions of dollars in home equity during the first two years of the COVID pandemic, some homeowners are now losing equity.
Tappable equity, defined by Black Knight as the amount a homeowner can borrow against while maintaining a 20% equity stake in the property, reached a 10-year high of $11.5 trillion in the second quarter of this year. However, data suggests that it may have peaked in May. Declining home values in June and July reduced total tappable equity by 5%, and given the deterioration in the housing market since then, the third quarter of this year will show a larger decline. “Some of the country’s most equity-rich markets have seen significant pullbacks, most notably key West Coast metros,” Graboske observed. San Jose, California, lost 20% of its tappable equity from April to July, followed by Seattle (-18%), San Diego (-14%), San Francisco (-14%), and Los Angeles (-10%).
Homeowners are still far better off than they were during the last major correction in the housing market. During the subprime mortgage crisis, which began in 2007, and the subsequent Great Recession, home values in some major markets fell by nearly half. Millions of borrowers have become underwater on their mortgages, owing more than the value of their homes. That is no longer the case. Current borrowers owe only 42% of the value of their home on both their first and second mortgages. It’s the lowest leverage ever recorded. Losing some paper value should have no effect on those owners. However, approximately 275,000 borrowers would be underwater if their homes lost 5% of their current value. More than 80% of those borrowers bought their homes in the first six months of this year when the market was at its peak. According to the report, even if all prices fell by 15%, negative equity rates would be nowhere near the levels seen during the financial crisis.
