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Home Equity Begins To Fall

Katie Jensen
Sep 07, 2022
home equity falls

July’s month-over-month decline represents the first contraction in nearly three years. 

KEY TAKEAWAYS
  • Black Knight’s home-price data has been indicating a cooling market for several months now, and at an increasing pace.
  • Annual home-price growth shifted from deceleration to decline in July, with the largest single-month decline since January 2011.
  • Some of the nation’s most equity-rich markets have seen significant pullbacks.
  • Despite a 128,000 rise in active listings, inventories remain 622,000 (45%) below 2017-19 levels. 

Black Knight Inc. released its latest Mortgage Monitor Report, showing that the deceleration in home-price growth on which the company has been reporting in recent months has shifted to an actual decline.

July’s month-over-month decline represents the first contraction in nearly three years. 

“After 31 consecutive months of growth, home prices pulled back by 0.77% in July,” Black Knight Data & Analytics President Ben Graboske said. “Annual home-price appreciation still came in at over 14%, but in a market characterized by as much volatility and rapid change as today’s, such backward-looking metrics can be misleading as they can mask more current, pressing realities.”

Black Knight’s home-price data has been indicating a cooling market for several months, and at an increasing pace. In January, prices rose at 28 times their normal monthly rate before slowing to five times average in February, as interest rates began to tick up. May was about two times normal, before June growth came in 70% below the long-run average. 

Meanwhile, annual appreciation continued to appear historically strong, with double-digit growth month after month. In the absence of timely, granular data, market trends don’t become apparent until they’re right in front of you, like a sudden shift to the largest single-month decline in home prices in more than a decade. 

"Similarly, while mortgage-holders’ tappable equity had grown 25% from last year to hit yet another record high in Q2, we noted that equity actually peaked in May and tracked the pullback that began in June before escalating in July,” Graboske said. “Tappable equity is now down 5% in the last two months, setting up Q3 to likely see the first quarterly decline in tappable equity since 2019.”

According to Graboske, some of the nation’s most equity-rich markets have seen significant pullbacks, most notably in key West Coast metros. From April to July, San Jose lost 20% of its tappable equity.  Seattle followed, shedding 18% of tappable equity over that same three-month span. Following that, San Diego (-14%), San Francisco (-14%), and Los Angeles (-10%) have all seen double-digit declines since April.

“Keep in mind,” Graboske noted, “that of the roughly 275,000 borrowers who would fall underwater from a 5% price decline, more than 80% purchased their homes in the first six months of 2022 — right at what appears to have been the top of the market. With prices continuing to correct and our McDash HELOC data showing home equity lending at its highest level in 12 years, we will keep a very close eye on equity positions in the coming months.”  

This month’s report looks again at the inventory side of the housing supply/demand equation. Falling housing demand continued to allow inventory levels to build for the fifth month in a row, with July marking the third consecutive record-breaking increase. Despite a 128,000 rise in active listings, inventories remain 622,000 (45%) below 2017-19 levels. 

Black Knight Collateral Analytics data shows 3.1-months’ worth of inventory as of the end of July, up from 1.7 months at the beginning of the year. If sales continue to fall at the rate they have the past four months and listings continue to build at their current pace, inventory would cross the six-month threshold by December — typically the point at which the landscape shifts from a seller’s to a buyer’s market. 

Key Takeaways From Mortgage Monitor Report: 

  • Annual home price growth shifted from deceleration to decline in July, as the median home price fell 0.77% from June — the largest single-month decline since January 2011
  • More than 85% of the 50 largest U.S. markets are at least marginally off their peaks through July, with home prices down by >1% in a third, and more than one in 10 seeing prices fall by 4% or more
  • Tappable equity — the amount a homeowner can borrow against while keeping a 20% equity stake — hit its 10th consecutive record high in Q2 2022 at $11.5 trillion but appears to have peaked in May of this year
  • Escalating declines in June and July have total tappable equity down 5% over the past two months, suggesting a sizeable reduction is likely in Q3, which would mark the first quarterly decline in three years
  • In some markets, equity pullbacks have quickly become fairly significant, with the five most equity-rich West Coast markets shedding 10%-20% of previously available tappable equity from April through July
  • The impact of home-price declines is twice as pronounced on tappable equity levels; a 5% decline in home values nationally would equate to a 10% decline in tappable equity, and so on.
  • Overall, the market is on strong footing to weather a correction; total market leverage as of Q2 — including both first and second liens — was just 42% of mortgaged homes’ values, the lowest on record. 
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