Many new homeowners are finding that they owe more on their mortgage than their home is worth as rising interest rates drive down home prices.
About 250,000 Americans who took out a mortgage to buy a home this year are now underwater, meaning the home is worth less than the loan they took out, according to new data from Black Knight. Another 1 million have less than 10% equity.
That’s because the highest mortgage rates in decades, combined with already steep home prices, have made it one of the worst times for consumers to buy a new home.
“While the home price correction has slowed, it has still exposed a significant pocket of equity risk,” said Ben Graboske, president of data and analytics at Black Knight. “Make no mistake: negative equity rates remain well below historical averages, but a clear bifurcation of risk has emerged between mortgage homes purchased at or before the start of the pandemic versus those purchased recently.”
Amid the COVID-19 pandemic, home prices have risen at a rate not seen since the 1970s, while mortgage rates have hit record lows. Homebuyers — flush with stimulus cash and desperate for more space during the pandemic — flocked to the suburbs; At the peak of the market, demand was so strong and inventory so low that some buyers forgo home inspections and appraisals or pay hundreds of thousands over the asking price.
But painfully high inflation and rising borrowing costs have proved a deadly combination for the housing market, dampening consumer demand and driving down house prices.
Overall, about 8 percent of mortgages taken out this year are underwater, or about one in 12 homes purchased in 2022. According to Black Knight, the situation is even worse for individuals with government-backed mortgages: About 25 percent of those buyers are now underwater this year.
“This is an illustrative and, unfortunately, potentially vulnerable cohort that we will continue to monitor closely in the coming months,” Graboske said.
The problem may get worse before it gets better. Some experts see that prices fell by 20% as a result of higher mortgage rates over the next year.
A combination of data released last month showed that the housing market is already deteriorating rapidly: Selling existing items houses fell in October for the ninth consecutive month; homebuilder sentiment fell to lowest level since 2012 in November; and investor home purchases fell by 30%.
Most experts agree that the housing market is deteriorating The Federal Reserve tightens policy to eliminate runaway inflation at its fastest pace in three decades.
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Policymakers have voted to approve six consecutive interest rate hikes this year, including four consecutive 75-basis-point hikes in June, July, September and November.
Average rate for a 30-year permanent mortgage It fell to 6.33% this week, according to the latest data released by mortgage lender Freddie Mac last week. That’s well above rates of 3.10% a year ago, though it’s down from a peak of 7.08%.