The stark and ongoing home price correction in the residential real estate market has led to U.S. mortgage holders collectively losing $1.3 trillion in equity during the third quarter, according to Black Knight.
With median home prices dropping by 2.6% from June to September, equating to a typical decline of $11,560, Black Knight’s newest Mortgage Monitor report revealed that the decline in equity during third-quarter 2022 represented by far the largest three-month slide in dollar volume on record. With 7.6% of nationwide equity vanishing during the same period, it also represented the largest decrease on a percentage basis since 2009.
Equity among mortgaged homes is now almost $1.5 trillion (8.4%) off its peak, which was reached in May 2022. The average borrower’s equity is down $30,000 since then.
“While hitting a record high in Q2, total homeowner equity peaked mid-quarter in May and has been pulling back ever since,” said Ben Graboske, Black Knight’s president of data and analytics. “From a risk perspective, we’ve already seen the number of underwater borrowers more than double alongside the equity pullback.”
Meanwhile, tappable equity — the amount available to homeowners to borrow against while still maintaining 20% equity in the home — has plunged. Black Knight’s prediction earlier in the fall that “a sizable reduction” of the metric was in the cards has been realized. Indeed, tappable equity at the end of September was at $10.5 trillion, down 9% from the second quarter and 10% below its May 2022 peak.
Graboske was quick to note that, despite the steep drops in equity and home values of late, home prices remain up 45% from the start of the COVID-19 pandemic. Median home prices are still at least 19% above their February 2020 levels in every major market in the country. And with home prices still elevated, the number of underwater homeowners remains far below previous norms, even with the recent bump.
“It’s important to note that – even with 275,000 falling underwater since May – fewer than half a million homeowners owe more on their homes than as currently valued. Historically speaking, that is still extremely low,” Graboske said.
“Also, as we’ve covered in prior Mortgage Monitors, the vast majority of homes at risk of falling underwater are those that were purchased in 2022 and late 2021, at or near pandemic-era peak prices,” he added. “This is obviously a situation that demands careful, ongoing monitoring, but to put that into context, just 3.6% of nearly 53 million U.S. mortgage holders are either underwater or have less than 10% equity in their homes – roughly half the share coming into the pandemic.
While additional declines may be on the horizon, Graboske noted, homeowner positions remain broadly strong. Mortgage holder equity is still $5 trillion (46%) above pre-pandemic levels, equating to an average gain of more than $92,000 per borrower in that time span. Along with rising interest rates, declining levels of equity increase the potential for further headwinds in home equity lending and heighten default risk, he said.