Mortgage software data and analytics company Black Knight revealed that of the 450,000 underwater borrowers noted during the third quarter, 60 percent were borrowers whose mortgages originated during the first nine months of this year. This means that one out of every 12 homes that were bought in 2022 so far with a mortgage are already underwater. They also found that 40 percent of the homes purchased this year have less than 10 percent in equity left to tap.
This state of affairs can be attributed to the sharp rise in mortgage rates being seen this year, which is putting pressure on housing values as the growth in home prices has been cooling at a record pace.
Black Knight President of Data & Analytics Ben Graboske said: “Though the home price correction has slowed, it has still exposed a meaningful pocket of equity risk.”
He added: “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.”
The jump in mortgage rates that has been seen this year has contributed to the situation. So far, rates have more than doubled in 2022, reaching a multi-decade high of 6.3 percent that is taking a toll on home sales and prices.
Experts note that it is not unusual for new homeowners to find themselves underwater for a short period, particularly if they purchase a home during the summer months when prices are traditionally higher, but the situation is far more pronounced this year on account of the cooling prices. Black Knight President of Enterprise Research Andy Walden noted that the proportion of underwater borrowers tripled this October.
Not surprisingly, it is lower-income households that are faring the worst right now. Walden added that markets where there is heavy use of lending options that require low down payments are the most affected.
When those who purchased homes with government-backed mortgages are considered on their own, the situation is more pronounced; one-fourth of these buyers are currently underwater. There are also some geographical variations, with more than 30 percent of the mortgaged homes purchased this year in Honolulu and Colorado Springs being underwater, while 22 percent of the homes in Virginia Beach that were purchased this year are already worth less than the amount that is owed on them.
In cities that have a large military presence and where many people depend on government-backed mortgages to purchase a home, such as San Diego, Riverside, Bakersfield and Stockton, 20 percent of mortgage loans purchased this year are currently underwater.
FHA and VA loans allow homeowners to buy properties using a relatively small down payment. It may be as low as 3 percent on an FHA loan, while eligible veterans may not have to make any down payment at all when purchasing a home with a VA loan. Although this can provide significant aid to borrowers on a lower income who struggle to save up for a down payment, it turns into a liability at times when home prices drop rapidly.
While being underwater for a period may not pose a big problem if a person does not intend to sell their home any time soon, it is problematic when homeowners are unable to pay their debt, which is another data point that has been increasing. According to Walden, borrowers who got mortgages this year are becoming delinquent earlier because they are more stretched. He believes that more people could well fall underwater as mortgage rates continue to rise and the Fed continues hiking interest rates.
Sources for this article include: