Homeowners Lose Wealth as Rising Interest Rates Affect Home Values

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

David Paul Morris | Bloomberg | Getty Images

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

Sales have been declining for months, and mortgage rates have now doubled compared to earlier this year.

Home prices also fell 0.77% from June to July, according to a recent report from Black Knight, a software, data and analytics company. While it 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.

“House prices continued to rise over 14% annually, but in a market as highly volatile and rapidly changing as it is today, such hindsights can be misleading as they may mask more current, pressing realities.” written by Ben Graboske. , President of Black Knight Data & Analytics.

In about 85% of the major markets, prices declined before July, with prices falling by more than 1% in one-third, and by 4% or more in about one in ten. As a result, after collectively making trillions of dollars in net worth in the first two years of the pandemic, some homeowners are now losing capital.

So-called affordable capital, which Black Knight defines as the amount a homeowner can borrow while keeping 20% ​​of the ownership, hit its 10th straight quarterly record high of $11.5 trillion in the second quarter of this year. But data suggests it may have peaked in May.

The decline in housing prices in June and July resulted in a 5% drop in total available capital, and given the weakening of the housing market since then, the fall will be more significant in the third quarter of this year.

“Some of the richest stock markets in the country have experienced significant declines, especially among key West Coast metros,” Graboske said.

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

Homeowners are still much better off than they were last time the housing market suffered a major correction. During the crash of subprime mortgages that began in 2007 and the Great Recession that followed, home values ​​nearly halved in some major markets. Millions of borrowers went under water on their mortgages, owing more than their homes were worth.

Today it is not so. Current borrowers, on average, owe just 42% of the value of their home on both their first and second mortgages. This is the lowest leverage ever seen. The loss of some value on paper should not affect these owners in any way.

However, there are about 275,000 borrowers who would drown if their homes lost 5% of their current value. Over 80% of these borrowers purchased their homes in the first six months of this year, which was the top of the market.

Even with a 15% price cut across the board, negative equity rates would still be far from levels seen during the financial crisis, according to the report.

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