Eight Percent of Newly Mortgaged Homes Underwater

Up to 8% of 2022 mortgaged homes purchases are now underwater while FHA loans are showing early signs of increasing defaults were the two major points of Black Knight’s latest Home Price Index as home prices decreased in October 2022 by 0.43% seen since prices peaked this June. 

Annualized appreciation slowed to a rate of 9.3% from September’s 10.7%, the seventh consecutive month of cooling. 

New listings were down in October 2022 by 19%, or 94,000 units, below historical averages. 

Of all homes purchased with a mortgage in 2022, 8% are now at least marginally underwater and nearly 40% have less than 10% equity stakes in their home, a situation most concentrated among FHA/VA loans. The negative equity rates among all mortgaged properties remain extremely low by historical standards at 0.84%. 

More than 25% of FHA/VA loan purchases have dipped into negative equity, with 80% having less than 10% equity.  

Also, early-payment defaults, otherwise known as loans that become delinquent within six months of origination, home been rising among FHA borrowers over rates seen in the past 

"We've now seen four consecutive months of home price pullbacks at the national level," said Ben Graboske, Black Knight’s Data and Analytics President. "But after a couple of significant drops earlier in the summer, the pace of cooling has slowed considerably, with October's non-seasonally adjusted drop of just 0.43% the smallest decline yet.” 

“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. While the median home price is now 3.2% off its June peak—down 1.5% on a seasonally adjusted basis—in a world of interest rates 6.5% and higher, affordability remains perilously close to a 35-year low.” 

“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. Indeed, the volume of new for-sale listings in October was 19% below the 2017-2019 pre-pandemic average,” Graboske continued. “This marks the largest deficit in six years outside of March and April 2020 when much of the country was in lockdown—with the overall market still more than half a million listings short of what we'd consider 'normal' by historical measures.” 

“Though the home price correction has slowed, it has still exposed a meaningful pocket of equity risk. 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. Of the 450K underwater borrowers at the end of Q3, the mortgages of nearly 60% had been originated in the first nine months of 2022—and these were overwhelmingly purchase loans. All in, 8% of purchase mortgages originated thus far in 2022 are now marginally underwater, with another 20% in low equity positions,” Graboske concluded. “Among FHA purchase mortgage holders specifically, more than 25% have slipped underwater and more than three-quarters have less than 10% equity. This is an illustrative and, unfortunately, potentially vulnerable cohort that we will continue to keep a close eye on in the months ahead.”  

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