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Homeowners lose wealth as rising interest rates weigh on home values

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

David Paul Morris | Bloomberg | Bloomberg | Getty Images

Some homeowners are losing money, at least on paper, as high mortgage rates squeeze home values.

Mortgage rates have doubled since earlier this year, and sales have slowed for months.

Similarly, a recent report from software, data and analytics firm Black Knight found that home prices fell 0.77% from June to July. It may not sound like much, but it’s the biggest monthly drop since January 2011 and the first monthly drop in 32 months.

“House price growth is still over 14% annually, but in a market characterized by as much volatility and rapid change as today, such backward-looking indicators mask a more current and pressing reality. It is misleading because it is possible,” wrote Ben Graboske. , President of Black Knight Data & Analytics.

About 85% of the major markets had peaked out by July, with one-third having fallen 1% or more and about one-tenth having fallen 4% or more. As a result, some homeowners are losing their fortunes after gaining trillions of dollars in total home equity in his first two years of the pandemic.

So-called tappable equity, which Black Knight defines as the amount a homeowner can borrow while maintaining a 20% equity stake in an asset, hit $11.5 trillion in the second quarter of this year, its 10th consecutive quarterly high. I hit a record. However, according to the data, it may have peaked in May.

Falling home prices in June and July reduced total available equities by 5%, with a further sharp decline in the third quarter of this year given the weakness in the housing market since then. I guess.

“Several of the nation’s most stock-rich markets, particularly the West Coast’s major cities, have seen significant declines,” Gravoske said.

From April to July, San Jose lost 20% of tappable stocks, followed by Seattle (-18%), San Diego (-14%), San Francisco (-14%) and Los Angeles (-10%). I was.

Homeowners are in much better spirits than the last time the housing market experienced a major correction. During the subprime mortgage crash that began in 2007 and the Great Recession that followed, home prices plummeted by almost half in some major markets. Millions of borrowers have defaulted on their mortgages with more debt than their homes are worth.

Not today. A current borrower, on average, owes only 42% of his home’s value on both his first and his second mortgage. This is the lowest leverage on record. Losing some value on paper shouldn’t affect their owners at all.

However, there are about 275,000 renters who would be submerged if their homes lost 5% of their current value. He topped the market with more than 80% of these borrowers buying homes in the first half of the year.

Even with an overall 15% drop in prices, negative equity rates would still be nowhere near the levels seen during the financial crisis, according to the report.

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