Freddie Mac to begin using personal bank account data as part of the underwriting process to increase homeownership opportunities.

How the Housing market lost trillions of dollars in equity in the third quarter!

Saying that the housing market has been frantic would be a great understatement.

It hasn’t been frantic; chaotic would be the word after a prolonged increase in housing prices, and now all roads point to a cool-off period. You would expect buyers to be excited about this, but they are not! Many wonder if buying a home during a recession is a wise investment.

Home prices have had a historic run-up in the last two years, giving many homeowners record amounts of new home equity since May; about $1.5 trillion of that equity has melted away! A new report from Black Knight highlighted that the average borrower had lost $30,000 in equity. Sales have been slowing down for the last couple of months, with the mortgage rates now double what they were at the beginning of the year. At the same time, home prices have dropped 0.77% from June to July and while it may seem insignificant, it is the largest monthly decline since January 2011 and the first monthly drop of any size in 32 months.

Home equity peaked last May, recording a $17.6 trillion gain collectively. This was after home prices jumped 45% since the pandemic’s start. Although equity has dropped, as of September, prices were still up 41%, and equity was still strong. Many borrowers who bought their homes before the pandemic collectively have $5trillion more than they did before the pandemic hit, which equals $92,000 more equity per borrower than in February of 2020.

“While additional declines may be on the horizon, homeowner positions remain broadly strong,” noted Ben Graboske, Black Knight’s president of data

and analytics.

As mortgage rates began to rise, home prices started to weaken, making it much less affordable to buy properties. In fact, with the current conditions, the average monthly mortgage payment on an average home with a 20% down payment is up nearly $1,000 since the start of the year.

The report also indicates that in 10% of the major US Real Estate Markets, including Las Vegas, Miami, LA, Phoenix, and San Diego, many homeowners have to contend with their new reality where they are being forced to spend nearly twice as much in the long-term average amount of median household income to make their monthly payments. Still, roughly 85% of the major markets have seen prices drop from established peaks through July. About one-third of these came down more than 1%, and about 1 in 10 have fallen by 4% or more. Consequently, many homeowners are starting to lose equity after gaining so much in the first 2 years of the pandemic. According to Black Knight, Tappable equity- which is the amount a homeowner can borrow against while keeping a 20% stake in the property hit its 10th consecutive quarterly high in the second quarter of 2022 at $11.5 trillion.

The declining equity witnessed in June and July brought the total amount of tappable equity down 5%. Given that the market is weakening, this equity might see a sizable drop before the year’s end.

“Some of the nation’s most equity-rich markets have seen significant pullbacks, most notably among key West Coast metros,” noted Graboske.

Looking at the individual markets, from April through July, San Jose, CA lost 20% of its tappable equity, Seattle lost 18%, San Diego 14%, San Francisco 14%, and Los Angeles 10%.

It is important to highlight that homeowners are still far more flush than when the market had a major correction. In fact, during the subprime mortgage crash, which began in 2007, home values had plummeted by nearly half in some of the major markets. Millions of homeowners went underwater on their mortgages, owing more than the value of their homes. Looking at the current market, this is not the case; current borrowers, on average, owe just 42% of their home’s value on both first and second mortgages. This is the lowest leverage on record. A noteworthy point to mention is that there are about 275,000 borrowers who would fall underwater if their “ homes were to lose 5% of their value. 80% of these borrowers purchased their homes in the first six months of this year, which was the top of the market. “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,”

Graboske said.

Industry experts express pessimism saying mortgage rates won’t fall for at least another year!

Mortgage rates have more than doubled this year, and there is hope that the current upheaval will retreat in 2023, according to a recent forecast from the Mortgage Bankers Assocation. The result of this sudden rise in mortgage rates is that many buyers have paused their buying until the rates have cooled. The problem with this is that no one can predict with certainty when the rates will stop rising, and clearly, many experts are divided on this issue due to economic uncertainty.

On the one hand, we have the mortgage bankers Association experts who are pessimistic about the economic outcome of the country saying that there is a high likelihood of the country entering a recession in the first quarter of next year. The FED will drive this recession as it enacts tighter financial conditions, which will hamper business investment, and another contribution factor will be slowed growth by most economies all over the world. This will, in turn, result in high unemployment rates up from their current level of 3.5% to 5.5% by the end of 2023.

WHAT THIS MEANS FOR THE INDUSTRY

While expressing pessimism about the economy, the real estate market, in general, might look good because the upshot for the homebuyers is that the rates might come down. According to forecasts by MBA, the rates might end at around 5.4% by the end of next year. The average 30-year, fixed mortgage rate at the beginning of the year was around

Next year will be particularly challenging for the US and global economies,” said Mike Fratantoni, chief economist and senior vice president for research and industry technology. “The sharp increase in interest rates this year – a consequence of the Federal Reserve’s efforts to slow inflation, will lead to an equally sharp slowdown in the economy, matching the downturn that is happening right now in the housing market.”

3.2%, and by late October, the rate had jumped to 7.08%- a 20-year high, according to Freddie Mac. Meanwhile, the average 15-year fixed mortgage rate rose sharply to 6.36%, while the average 5/1 ARM mortgage was 5.96%.

While that might be the case, it is important to note that the path ahead is murky; there is high volatility in the market in the coming months as the FED is expected to continue to raise the interest rates before the year ends. Ultimately, the decision by FED to hike the interest rate is a good move as it is intended to tame inflation. That in itself is slowing the buyer’s demand for mortgages in 2023.

“The Fed has reiterated its commitment to keeping the monetary tightening course, warning that consumers and businesses can expect more ‘pain’ ahead,” says George Ratiu, Realtor.com’s director of economic research.

At the same time, originations are expected to decline steadily to $2.05 trillion in 2023 from $2.26 trillion expected before the year’s end. Additionally, the refinance volume is anticipated to decline by 24%.

A FLAT REAL ESTATE MARKET IN 2023 AND POSSIBLY 2024

The rise in rates has made it hard for buyers to acquire properties in the market. According to MBA, we are experiencing a slowdown in housing activity, and the continued rise in mortgage rates will cut the pace of home price growth. If the situation remains unchanged, the forecast projects national home prices to be roughly flat.

“This will allow household incomes some muchneeded time to catch up to elevated property values,” said Joel Kan, vice president and deputy chief economist at MBA. “However, many local markets will see home price declines, even if national price measures remain largely unchanged.”

A unique set of characteristics will shape the market next year. First, it is highly likely that homebuyers will account for the largest portion of housing demand for the next few years. That said, many owners are unwilling to let go of their properties just to capitalize on the ultra-low mortgage rates they may have acquired their properties within the previous years, which means the market is already constrained as there are few starter homes. A combination of low inventory and a slowing new construction activity means that there will be a supply imbalance.

As people get laid down and unemployment rises during the recession, mortgage delinquencies at the moment are at a low point and will rise. “The national mortgage delinquency rate reached a record low in the second quarter of 2022 but will likely increase with the uptick in unemployment and the destruction caused by Hurricane Ian in Florida, South Carolina, and other nearby states,” said Marina Walsh, vice president of industry analysis.

Walsh also expressed concern that the mortgage industry will take a hit during the recession. “Origination volumes have declined, revenues have dropped, and expenses continue to rise,” said Walsh. “Lenders have started to shrink excess capacity by reducing staffing levels, exiting less profitable channels or exiting the business entirely.”

WHAT WE KNOW RIGHT NOW

The current state of the mortgage market is that there is a tug-of-war between inflation and the FED’s activity to tame it. Since the first hiking activity in March, the FED has continued to do this a total of five times through September. When writing this article, the FED had plans to raise interest rates again before the year ends in a meeting in early November.

Some experts are still optimistic that the mortgage rates have reached their peak and have gotten used to the fluctuations.“I would be surprised if [rates] would [go] up from here - but I’ve been saying that for the past couple of months, and I keep being surprised,” says Daryl Fairweather, chief economist at Redfin. “But even if rates stay at 7% for another couple of months, it’s going to really slow down the housing market.”