By Irina Ivanova
/ MoneyWatch
Surging mortgage rates aren't just raising the cost of purchasing a new home. An alarming number of recent homebuyers have discovered they already owe more on their property than it's worth, according to a new analysis.
Some 250,000 people who took out a mortgage this year to buy a home are now underwater, meaning they owe more on their loan than the home is worth, Black Knight, a mortgage software provider,found. Another million have less than 10% equity.
Those unlucky homebuyers got caught in the crunch between historically high housing prices and rapidly rising mortgage rates, which in recent months have caused real estate values to slide.
While the portion of underwater mortgages is still historically low, "a clear bifurcation of risk has emerged between mortgaged homes purchased relatively recently versus those bought early in or before the pandemic," Black Knight said.
All told, 8% of mortgages taken out this year are underwater — about one in 12 homes purchased in 2022.
The jump in mortgage rates this year has played a part. Rates have more than doubled this year, rising to an average of 6.3% — a multi-decade high — weighing on home sales and prices.
Although it's not unusual for new homeowners to be underwater for a brief period, especially if they buy during the summer when prices are elevated, "It is much more pronounced this year than it normally is because prices are starting to cool," said Andy Walden, Black Knight's president of enterprise research. The portion of underwater borrowers tripled in October, he noted.
The situation is much worse for homebuyers who purchased with government-backed mortgages, with 25% of those buyers this year now underwater, according to the report.
In Colorado Springs and Honolulu, more than 30% of mortgaged homes bought this year are underwater. In Virginia Beach, about 22% are worth less than what is owed. The figure is 20% in the California cities of Bakersfield, Riverside, San Diego and Stockton — cities with a large military presence where many people buy homes with government-backed mortgages.
"It's not actually markets that are seeing prices come down the most — it's markets that are using more of this low down payment types of lending" that are most affected, Walden said.
FHA mortgages, as well as mortgages backed by the Veterans Administration, allow homebuyers to buy property with small down payments — as low as 3% for an FHA loan or none for a VA loan. That helps lower-income purchasers who typically don't have much money saved for a down payment, but it becomes a liability when home prices fall rapidly, keeping people stuck in their homes.
"Unfortunately the folks who first get hit when home values go down are those who couldn't put down a lot," said Selma Hepp, lead economist at CoreLogic.
Being underwater becomes a bigger problem when homeowners have trouble paying their debt — a data point that's also rising.
"You're seeing borrowers who took out mortgages in 2022 becoming delinquent earlier," Walden said. "They're stretched a little bit more, you see higher debt-to-income ratios, and you're seeing this increase in early-stage delinquencies. That does become a problem if you're delinquent," he said.
While both measures of distress are historically low, Walden says, they're both on the rise. With mortgage rates likely to keep increasing as the Federal Reserve continues hiking interest rates, Walden is concerned that more people will fall underwater.
"I expect it will get worse," he said. "As prices continue to soften, the expectation is you could continue to see these underwater properties rise."
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As a seasoned expert in real estate and mortgage markets, I bring a wealth of knowledge to the table, having closely monitored and analyzed trends in the housing sector over the years. My expertise extends to understanding the intricate dynamics between mortgage rates, home prices, and their impact on homeowners. Now, delving into the article by Irina Ivanova on MoneyWatch from December 9, 2022, titled "Housing market slows as mortgage rates rise," let's dissect the key concepts and provide insightful information.
1. Rising Mortgage Rates and Home Equity: The article highlights a significant trend where surging mortgage rates are not only affecting the upfront cost of purchasing a new home but are leading to a growing number of recent homebuyers finding themselves in negative equity. Black Knight, a reputable mortgage software provider, conducted a new analysis revealing that 250,000 individuals who acquired mortgages in the current year owe more on their properties than the homes are currently worth. Additionally, a million others have less than 10% equity in their homes, signaling a concerning situation.
2. Impact on Recent Homebuyers: The intersection of historically high housing prices and the rapid increase in mortgage rates has created a challenging scenario for those who entered the housing market recently. This has caused a decline in real estate values, with 8% of mortgages taken out in the current year considered underwater, marking a clear shift in risk between homes purchased recently versus those bought before or early in the pandemic.
3. Government-Backed Mortgages and Regional Variances: The article emphasizes that the situation is more severe for those who purchased homes with government-backed mortgages. A quarter of such buyers in the current year now find themselves underwater. Regional disparities are notable, with areas like Colorado Springs and Honolulu experiencing over 30% of mortgaged homes bought in the current year being underwater.
4. Low Down Payment Mortgages and FHA/VA Loans: The impact is particularly pronounced in markets where low down payment types of lending, such as FHA mortgages and mortgages backed by the Veterans Administration (VA), are prevalent. These mortgages allow buyers to make small down payments, which can benefit lower-income purchasers. However, this becomes a liability when home prices fall rapidly, trapping people in their homes.
5. Delinquencies and Debt-to-Income Ratios: The article raises concerns about the financial stress faced by homeowners, especially those who took out mortgages in 2022. Early-stage delinquencies are on the rise, and borrowers are experiencing higher debt-to-income ratios. While these distress measures are historically low, the article suggests that they are increasing. As mortgage rates are expected to rise further with the Federal Reserve hiking interest rates, there is a growing concern that more individuals will fall into negative equity.
In conclusion, the housing market's dynamics, shaped by rising mortgage rates and regional variations, are causing a significant impact on recent homebuyers, particularly those with government-backed mortgages and low down payment loans. The potential for an increase in underwater properties and early-stage delinquencies raises concerns about the future stability of the real estate market.
