Americans who bought a home this year are facing rising underwater risk as home prices cool.
Black Knight’s October Mortgage Monitor found that 8% of homes bought in 2022 are now at least marginally underwater, while almost 40% have less than a 10% equity stake in their homes.
“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,” said Black Knight President Ben Graboske.
“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.”
This is a particular issue among FHA/VA loan holders.
More than 20% of 2022 FHA/VA purchase loan holders now have negative equity and almost two-thirds have less than a 10% equity stake.
Early-payment defaults for this group are now above pre-pandemic levels and still rising.
“This is an illustrative and, unfortunately, potentially vulnerable cohort that we will continue to keep a close eye on in the months ahead,” Graboske said.
Equity risk remains minor for those who bought a home before 2022, and negative equity rates for all properties remain historically low at 0.84%.
The cooling market has forced sky-high home prices down.
Price declines slowed slightly in October, with prices down only 0.43%, but more price declines and dwindling demand are expected to continue.
“In one line: Collapse in prices is coming,” Kieran Clancy, senior U.S. economist at Pantheon Macroeconomics, recently wrote.
Pantheon predicts that existing home prices will eventually plummet 20% from their June peak of approximately $414,000.
“Though seemingly counterintuitive, the much higher rate environment may be limiting the pace of price corrections due to its dampening effect on inventory inflow and subsequent gridlock in home sale activity,” Clancy wrote.
New listings fell 19% from 2017-2019 levels, the largest deficit in six years aside from the lockdown months in early 2020.
Home delistings hit a record high in November as sellers who missed out on high competition last year get smaller offers than they wanted to accept or no offers at all.
“Some sellers are having a hard time grasping that we’re not in a housing-market frenzy anymore — it’s tough for them to swallow that they missed the boat on getting a high price,” said Heather Kruayai, a Redfin real estate agent in Jacksonville, Florida.
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