Recent data from Black Knight indicates that over 8 percent of all homes purchased with a mortgage in 2022 are now considered underwater as the housing market begins to correct.
Since the summer, the prices of homes have been on the decline. Recent months have seen less of a decline that many expected.
“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…,” Black Knight Data and Analytics President Ben Graboske said in a press release. “Add in the effects of typical seasonality and one might expect a far steeper correction in prices than we have endured so far, but the never-ending inventory shortage has served to counterbalance these other factors.”
The data from Black Knight indicates that the market isn’t poised to get better in the immediate future. November saw a 40 percent deficit in for sale listings. A further tightening of supply is expected as sales declines are offset by listing pullbacks.
Even though the correction has slowed, it has already begun to expose potential equity risks almost entirely centered on purchase loans originated in the last 12 months. Of the 450,000 underwater borrowers at the end of the third quarter, the mortgages of nearly 60 percent had been originated in the first nine months of 2022 – and these were overwhelmingly purchase loans.
Accordingly, 5 percent of purchase mortgages originated thus far in 2022 are now marginally underwater, with another 20 percent in low equity positions. Among Federal Housing Administration purchase mortgage holders specifically, more than 20 percent are currently underwater and two-thirds have less than 10 percent equity.
“Though the home price correction has slowed, it has still exposed a meaningful pocket of equity risk,” Graboske said. “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. 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.”