Home price corrections exposed a growing pocket of equity risk concentrated among purchase mortgages originated in 2022, Black Knight said in its latest mortgage monitor report. Of all homes purchased with a mortgage in 2022, 8% are now at least marginally underwater.
Of the 450,000 underwater borrowers at the end of the third quarter, nearly 60% of the mortgages originated in the first nine months of 2022, according to Black Knight. All in, 5% of purchase mortgages originated so far this year are now marginally underwater, with another 20% in low equity positions.
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.
“A clear bifurcation of risk has emerged between mortgaged homes purchased relatively recently versus those bought early in or before the pandemic,” Ben Graboske, president of Black Knight data and analytics, said in a statement.
Among FHA purchase mortgage holders, more than 20% have slipped underwater, and a full two-thirds have less than 10% equity.
While still relatively low among conforming loans, the early payment default rate – which captures mortgages that have become delinquent within six months of origination – rose among FHA loans to reach its highest level since 2009, excluding the months in the immediate wake of the pandemic, the report said.
Despite home price growth pulling back and interest rates coming down from peak levels, housing affordability remains a challenge.
For-sale listings are below 2017-2019 levels and stalled inventory growth is softening downward pressure on home prices.
In its seventh consecutive month of cooling, annualized appreciation slowed to 9.3% in October from September’s 10.7%, but it was the smallest such decline since May.
“We’ve now seen four consecutive months of home price pullbacks at the national level,” Graboske said. “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.”
While counterintuitive, the 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, Graboske added.
October listings ran 19%, or 94,000, below pre-pandemic levels in the largest deficit in six years outside of the March and April 2020 lockdown.
“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,” he said.