By Liam Cosgrove
In the third quarter, the market lost $1.3 trillion, or 7.6 percent in equity, as home values nationwide began to fall. This marked the largest quarterly decline on record, according to Black Knight, a mortgage software and analytics company.
Following the unprecedented real estate boom of the last two years, signs of a slowing housing market are beginning to emerge.
According to Ben Graboske, president of Black Knight, homeowner equity contracted at a record rate in the third quarter after peaking in the second quarter of this year.
“In the span of just three months, U.S. mortgage holders saw a total of $1.3 trillion in newly acquired equity evaporate,” Graboske said in a statement.
Homeowner equity reached a height of $17.6 trillion in May, as home values increased by 45 percent since the start of the pandemic.
According to the report, equity among mortgaged homes is now about $1.5 trillion (-8.4%) lower than it was in May, with the average borrower’s equity having dropped by $30,000.
Despite this, “equity positions remain strong,” the report adds, citing that the average mortgage holder has $92,000 more in equity than before the pandemic.
Ominously, however, the proportion of mortgage holders who are “underwater”—that is, owe more than the current worth of their home—is increasing. “From a risk perspective, we’ve already seen the number of underwater borrowers more than double alongside the equity pullback,” Graboske cautioned, while noting that the overall percentage of underwater owners remains historically low.
The vast majority of these underwater mortgage holders purchased their homes in 2022 or late 2021, which coincided with prices “at or near pandemic-era peak prices,” according to Graboske.
The report also found that “San Francisco became the first market to see prices fall year over year in September.” San Francisco’s annual growth rate came in at negative 1.3 percent, with the next lowest growth rate in San Jose, California, at 0.2 percent.
While Florida’s home price growth rates are steadily falling, the state continues to dominate the rankings, with four of its cities ranking in the top five in terms of yearly home price appreciation. Miami’s price appreciation, for example, was the highest in the country, at 22.7 percent year over year.
Black Knight also tracked the impact of Hurricane Ian on the housing market. The report notes that 335,000 properties were in the direct path of the hurricane, suggesting the owners “face a higher risk of property damage and mortgage delinquency.”
In aggregate, this grouping of mortgage holders account for an unpaid balance of roughly $71 billion.
By tracking mortgage payments through the first half of October, Black Knight discovered a slightly higher delinquency rate from property owners located in Ian’s path. The data firm estimates that 20,000–25,000 borrowers will be affected.
The report also notes that real estate prices remain elevated compared to 2019 levels.
“Despite price corrections, home values in the nation’s 50 largest markets remain elevated by anywhere from 19 percent to 66 percent since the start of the pandemic.”
This is not, however, likely to be the end of pain for homeowners, according to Graboske. As he sees it, continued tightening by the Federal Reserve “increases the potential for even further headwinds in equity lending as well as heightened default risk.”