About 270,000 homebuyers who bought during this year’s hot housing market owe more than their home is worth, a new analysis shows.
Of the 450,000 underwater borrowers in the third quarter, nearly 60 percent had mortgages starting in the first nine months of 2022, black Knight Find. That’s about 1 in 12 homes bought in 2022 with a mortgage, or 8%. Nearly 40% of homes purchased this year have less than 10% of equity left to exploit.
The figures reflect another fallout from this year’s rapidly rising mortgage rates, which have weighed on home values as House price growth cooled down at a record pace month after month.
Ben Graboske, president of data and analytics at Black Knight, said: “Although the home price adjustment has slowed, it still carries a significant equity risk. “Make no mistake: negative equity ratios continue to be much lower than the historical average, but there has been a clear division of risk between mortgage homes purchased relatively recently vs. with homes purchased early or before the pandemic.”
Low-income households are most vulnerable
The report found that borrowers with home loans backed by the Federal Housing Administration (FHA) or the Department of Veterans Affairs (VA) were more likely to have slipped into the water. These are more popular among first-time buyers and lower income earners.
Black Knight found that FHA loan holders face the biggest equity challenges, with more than 25% of FHA loan holders falling into the water. In addition, about 80% have less than 10% stake in their home.
Early payment defaults (EDPs) – loans that are past due within six months of initiation – have also been on the rise across product categories in recent months with the biggest increase among those FHA loans in the past year. As of October, the EDP rate for FHA loans is 150% above 2013-2018and 25% higher than their early 2000 average, the report found.
In contrast, early payment default rates among those with matched loans are 70% lower than early 2000 levels, and VA loans are less than half that threshold.
“Lending like that [FHA] It relies on the added value of the home and principal payments over time to gradually improve their equity position, says Graboske. “This is…unfortunately, the potentially vulnerable cohort that we will continue to monitor closely in the coming months.”
Recent buyers have higher risk
Most of the people most at risk of loan default are those who bought when home prices were at their highest, Black Knight found. At least 10% of purchases in June – when home prices peaked at $438,000 – were underwater, with more than 30% having less than 10% equity.
although home Prices have cooled over the past seven months, with prices now down 3.2% from June highs, the price adjustment not enough to assuage concerns about affordability among homebuyers.
“In a world with interest rates of 6.5% or more, affordability remains near a 35-year low,” said Graboske. “The risk among previous purchases is essentially non-existent due to the large equity cushion these mortgage holders are sitting on. Recent homebuyers don’t like it either.”
Higher mortgage rates could also limit the rate of price adjustment, said Graboske, given its effect on inventory flows and the subsequent bottleneck on home sales. New home sales volume was 19% below the 2017-2019 average, the largest shortfall in six years, excluding March and April 2020 during the pandemic-induced closures.
According to the report, the market is currently short of more than half a million listings that are considered normal by historical measures.
“Add in the effects of typical seasonality and one can expect a much deeper price correction than we have endured so far,” said Graboske.
Gabriella is a personal finance reporter at Yahoo Money. Follow her on Twitter @__gabriellacruz.
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