By Gabriella Cruz-Martinez
December 6, 2022
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About 270,000 homebuyers who bought during the red-hot housing market this year already owe more than their house is worth
Among the 450,000 underwater borrowers in the third quarter, nearly 60% had mortgages originated in the first nine months of 2022, Black Knight found. That's about 1 in 12 homes purchased in 2022 with a mortgage, or 8%. Nearly 40% of homes bought this year have less than 10% of equity left to tap.
The figures reflect yet another fallout from rapidly rising mortgage rates this year, which have put pressure on housing values as home price growth cools at a record pace month over month.
“Though the home price correction has slowed, it has still exposed a meaningful pocket of equity risk,” Ben Graboske, president of Black Knight data and analytics, said in a news statement. “Make no mistake: negative equity rates continue to run far below historical averages, but a clear bifurcation of risk has emerged between mortgaged homes purchased relatively recently versus those bought early in or before the pandemic.”
Lower-income households hurt the most
Borrowers with purchase loans backed by the Federal Housing Administration (FHA) or Veterans Affairs (VA) were most likely to have slipped underwater, the report found. These are more popular among first-time and lower-income buyers.
Those with FHA loans faced the largest equity challenges, Black Knight found, with more than 25% of folks with FHA loans falling underwater. Additionally, some 80% had less than a 10% equity stake in their homes.
Early-payment defaults (EDP) — loans delinquent within six months of origination — were also rising across product types in recent months with the largest increases among FHA borrowers over the past year. As of October, EDP rates for FHA loans were 150% above 2013-2018 levels, and 25% above their early 2000 averages, the report found.
By contrast, early-payment default among those with conforming loans were more than 70% below early 2000 levels, and VA loans were less than half that same threshold.
“Such loans [FHA] rely on rising home values and principal pay-downs over time to gradually improve their equity position,” Graboske said. “This is ... unfortunately, potentially vulnerable cohort that we will continue to keep a close eye on in the months ahead.”
Recent buyers at greater risk
Most of the folks at risk of having their loans slip underwater were those who purchased when home prices were at their highest, Black Knight found. At least 10% of June purchase originations – when home prices peaked at $438,000 – were underwater, with more than 30% having less than 10% equity.
Although home prices have cooled for the last seven months, with prices now 3.2% down from June’s high, the pricing adjustment hasn’t been enough to ease homebuyers' affordability concerns.
“In a world of interest rates 6.5% and higher, affordability remains perilously close to a 35-year low,” Graboske said. “Risk among earlier purchases is essentially nonexistent given the large equity cushions these mortgage holders are sitting on. More recent homebuyers don’t fare as well.”
Higher mortgage rates may also be limiting the pace of price corrections, Graboske said, due to its damping effect on inventory inflow and subsequent gridlock on home sales activity. The volume of new homes for sale was 19% below the 2017-2019 average, the largest deficit in six years with the exception of March and April 2020 during pandemic-induced lockdowns.
According to the report, the current market is short by more than a half-million listings of what is considered normal by historical measures.
“Add in the effects of typical seasonality and one might expect a far steeper correction in prices than we have endured so far," Graboske said. "But the never-ending inventory shortage has served to counterbalance these other factors.”
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