Homeowners lose wealth as rising interest rates weigh on home values

“For Sale” sign outside a home in Albany, California, on Tuesday, May 31, 2022.

David Paul Morris | Bloomberg | beautiful pictures

Some homeowners are losing wealth as high mortgage rates weigh on home values, at least on paper, as the once hot housing market cools rapidly.

Sales have slowed for several months, with mortgage rates now more than double what they were earlier this year.

Similarly, home prices fell 0.77% from June to July, according to a recent report from Black Knight, a software, data and analytics company. While that may not sound like much, it was the biggest monthly drop since January 2011 and the first monthly drop of any size in 32 months.

Year-over-year home price increases remain at more than 14%, but in a market characterized by as much volatility and rapid change as today, such out-of-date figures can be misleading as they can be misleading. cover up more pressing realities,” writes Ben Graboske, president of Black Knight Data & Analytics.

About 85% of the major markets saw prices peak throughout July, with a third down more than 1% and about 1/10 down 4% or more. As a result, after collecting trillions of dollars in shared home equity in the first two years of Covid pandemicsome homeowners are now losing equity.

So-called exploitable equity, which Black Knight defines as the amount a homeowner can borrow while holding a 20% stake in the property, hit a record 10th straight quarterly high in in the second quarter of this year at $11.5 trillion. But data suggests it may have peaked in May.

The drop in home values ​​in June and July has resulted in a 5% drop in total usable equity, and with the housing market weakening since then, the third quarter of this year should show an uptick. more significant decline.

“Some of the nation’s most equity-rich markets have seen significant declines, most notably among major West Coast metropolises,” noted Graboske.

From April to July, San Jose, California, lost 20% of its payable equity, followed by Seattle (-18%), San Diego (-14%), San Francisco (-14%) and Los Angeles (-10%) .

Homeowners are still much more relaxed than the last time the housing market experienced a major correction. During the subprime mortgage crisis, which began in 2007 and the Great Recession that followed, home values ​​plummeted by nearly half in several major markets. Millions of borrowers have sunk into their mortgages, owed more than their homes are worth.

That is not the case today. Current borrowers, on average, owe just 42% of their home’s value on both their first and second mortgages. This is the lowest leverage on record. The loss of some paper value has no effect on those owners at all.

However, about 275,000 borrowers will fall into the water if their home loses 5% of its current value. More than 80% of borrowers bought their home in the first six months of this year, a number that tops the market.

Even if prices drop 15%, negative equity ratios will still not be near the levels seen during the financial crisis, according to the report.

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