From the November/December 2022 issue of the Housing News Report
Rising mortgage rates have begun taking their toll on the housing market. As rates for a 30-year fixed-rate mortgage have doubled from where they were a year ago in just a few months, affordability has worsened dramatically, and home sales – both existing homes and new homes – have fallen off deeply from 2021 numbers. According to the National Association of Realtors® (NAR), September sales were off by almost 24 percent from the prior year; and the U.S. Census Bureau reported that new home sales for the month were down by almost 18 percent compared to 2021.
Usually, slower sales – especially when driven by weakening demand from prospective home buyers – results in lower home prices. But the extremely limited inventory of homes for sale, coupled with pent-up demand, has resulted in home prices continuing to rise on a year-over-year basis, albeit at a much slower rate than earlier in the year. After months of double-digit annual increases, the median sale price of an existing home went up by about two percent nationally, and even less than that in California, which is often considered a bellwether state when it comes to real estate trends.
Even at this slower pace, however, rising home prices have contributed to an enormous amount of homeowner equity. According to a recently published report by Freddie Mac, homeowner equity across the United States has climbed to an all-time high of over $29 trillion, driven in no small part by the enormous increase in home values over the past few years.
Record Number of Equity Rich Homeowners
ATTOM, in its recently published Q3 2022 Homeowner Equity and Underwater Report, noted that almost half of all U.S. homeowners (48.5 percent) were “equity rich,” meaning that the meaning that the combined estimated amount of loan balances secured by their properties was no more than 50 percent of their home’s estimated market value.
The portion of mortgaged homes that were equity-rich in the third quarter of 2022 increased from 48.1 percent in the second quarter of 2022 and from 39.5 percent in the third quarter of 2021. The latest increase was smaller than gains in recent years. But it still marked the 10th straight quarterly increase and found that at least half of all mortgage-payers in 20 states were equity-rich in the third quarter, compared to only seven states a year earlier.
Overall, 94.3 homeowners paying off mortgages had at least some equity built up in the third quarter of this year, compared to 92.9 percent a year earlier and 87.7 percent in the third quarter of 2020. That level rises further when accounting for homeowners who have paid off their mortgages.
Across the country, 39 states saw equity-rich levels increase from the second quarter of 2022 to the third quarter of 2022, while seriously underwater percentages dipped in 38 states. Year over year, equity-rich levels rose in all 50 states and seriously underwater portions dropped in 43 states.
While equity rose everywhere, the largest increases in the equity-rich share of mortgages were in states across Midwest, Northeast and South. Nine of the 10 states where the equity-rich share of mortgaged homes increased most from the second quarter of 2022 to the third quarter of 2022 were in the Midwest, Northeast and South regions of the U.S. The biggest increases were in South Dakota, where the portion of mortgaged homes considered equity-rich rose from 36.7 percent in the second quarter to 41.8 percent in the third quarter, Vermont (up from 71.4 percent to 75.9 percent), Montana (up from 48.1 percent to 51.5 percent), Indiana (up from 43 percent to 46.2 percent) and Mississippi (up from 29.1 percent to 31.5 percent).
The highest levels of equity-rich properties around the U.S. remained in the West during the third quarter of 2022, with six of the top 10 states located in that region. The top states were Vermont (75.9 percent of mortgaged homes were equity-rich), Idaho (65.8 percent), Arizona (63.4 percent), Florida (62.8 percent) and Utah (62 percent).
How Record Equity Impacts the Housing Market
All this equity has very practical implications for a number of different aspects of the market, and the mortgage industry is a prime example.
Higher interest rates have effectively shut down rate-based refinance (refi) lending. Refi volume has fallen off by over 80 percent in 2022. Purchase loan applications, according to the Mortgage Bankers Association (MBA), are over 20 percent lower than they were a year ago, and much lower than that since rates started to increase. The NAR expects existing home sales to be 15 percent lower for all of 2022 than they were in 2021, and to fall by another 7 percent in 2023. The MBA also projects a weaker 2023, with home sales falling by 8 percent.
With both the purchase and refi loan markets struggling, lenders are increasingly turning to loan products that enable homeowners to tap into their equity: home equity loans and home equity lines of credit (HELOCs). In fact, ATTOM’s Q2 2022 Residential Property Mortgage Origination Report showed that HELOC lending increased by an astounding 44 percent from the prior year. HELOCs give lenders a much-needed product to market to a customer base with record amounts of equity to tap into. Borrowers might be inclined to leverage this equity to pay down more expensive credit card or personal debt; upgrade their current home (especially since many homeowners with low-rate mortgages are likely to stay put until rates on new loans come back down); or to set aside as an emergency fund in the event the country suffers from a recession, and they run into financial difficulties.
Another part of the housing ecosystem is in the distressed part of the market – specifically homes in foreclosure. While foreclosure activity remains extremely low compared to historical averages, foreclosure starts have begun to inch back towards pre-pandemic levels. But unlike the situation facing most financially distressed borrowers during the Great Recession, the vast majority of homeowners facing foreclosure today have at least some positive equity.
Only about 227,100 homeowners were facing possible foreclosure in the third quarter of 2022, or just four-tenths of one percent of the 58.1 million outstanding mortgages in the U.S. Of those facing foreclosure, about 208,700, or 92 percent, had at least some equity built up in their homes. One of the reasons most industry analysts don’t believe there will be another huge wave of foreclosures is that the overwhelming majority of financially distressed homeowners do have positive equity. If these borrowers can’t leverage the equity to refinance their current mortgage, they at least have the option of selling the property rather than losing their equity to a foreclosure auction. This option wasn’t available to distressed borrowers during the Great Recession, when many borrowers were underwater on their loans. There are also options available today for borrowers to leverage their equity to catch up on past due bills by working with so-called “equity sharing” companies such as Unlock or Unison. All this equity adds up to borrowers having numerous options available to prevent foreclosures, and the damage that high levels of distressed properties can do to home prices in a neighborhood or community.
The bottom line is that today’s record level of equity should help the housing market get through the expected downturn in 2023 and be well-positioned to recover once the volatility in mortgage rates and the U.S. economy have settled back into more normal patterns in the (hopefully) not-too-distant future.