Homeowners lose wealth as rising interest rates weigh on home values

A “For Sale” sign in front of a home in Albany, Calif., on Tuesday, May 31, 2022.

David Paul Morris | Bloomberg | Getty Images

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

Sales have been slowing for several months as mortgage rates have now doubled from what they were at the start of the year.

Similarly, home prices 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 seem like much, it was the biggest monthly decline since January 2011 and the first monthly decline of any magnitude in 32 months.

“Annual house price appreciation has always been more than 14%, but in a market characterized by as much volatility and rapid change as today, such backward-looking measures can be misleading because they can hide more current and pressing realities,” Ben Graboske wrote. , president of Black Knight Data & Analytics.

Around 85% of major markets saw prices hit highs through July, with a third down more than 1% and around one in 10 falling 4% or more. As a result, after collectively gaining trillions of dollars in home equity in the first two years of the pandemic, some homeowners are now losing capital.

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

Falling home values ​​in June and July caused total usable equity to fall by 5%, and given the weaker housing market since then, the third quarter of this year will show a larger decline. .

“Some of the country’s most equity-rich markets saw significant pullbacks, especially among major West Coast metropolises,” Graboske noted.

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

Homeowners are still much more greedy than they were the last time the housing market suffered a major correction. During the subprime mortgage crash, which began in 2007, and the Great Recession that followed, home values ​​fell nearly in half in some major markets. Millions of borrowers have plunged into their mortgages, owing more than their home is worth.

This is not the case today. Current borrowers, on average, only owe 42% of their home’s value on first and second mortgages. This is the lowest leverage effect ever recorded. Losing value on paper should not affect these owners at all.

There are, however, around 275,000 borrowers who would go under if their home lost 5% of its current value. More than 80% of these borrowers bought their homes in the first six months of this year, which was the top of the market.

Even with a 15% universal price drop, negative interest rates would still be far from the levels seen during the financial crisis, according to the report.

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