Rising mortgage rates are not only driving up the cost of buying a new home. An alarming number of homebuyers have recently discovered that they already owe more on their properties, according to a new analysis.
Black Knight, a mortgage software provider, found that nearly 250,000 people who took out mortgages to buy a home this year are now underwater, meaning they owe more on their loans. Another million have less than 10% equity.
Those unlucky homebuyers got caught in the crunch amid historically high housing prices and rapidly rising mortgage rates, which has caused real estate values to plummet in recent months.
While the share of underwater mortgages is still historically low, “a clear dichotomy in risk has emerged among mortgage homes purchased relatively recently or before the pandemic,” Black Knight said.
All told, 8% of mortgages taken out this year are underwater – roughly one in 12 homes purchased in 2022.
The jump in mortgage rates this year has played a role. Rates have more than doubled this year, rising to an average of 6.3% – aWeigh in on home sales and prices.
While it’s not uncommon for new homeowners to be underwater for a brief period, especially if they buy during the summer when prices go up, “it’s more pronounced than usual this year as prices start to cool down.” ,” said Andy Walden, Black Knight’s president of enterprise research. The share of borrowers who took loans under water tripled in October, he added.
The situation is far worse for home buyers who bought with government-backed mortgages, with 25% of those buyers now underwater this year, according to the report.
In Colorado Springs and Honolulu, more than 30% of mortgaged homes purchased this year are underwater. In Virginia Beach, about 22% are below dues. That figure is 20% in the California cities of Bakersfield, Riverside, San Diego and Stockton – cities with a large military presence where many people buy homes with government-backed mortgages.
Walden said “it’s not really the markets that are seeing the biggest drop in prices — it’s the markets that are using more of this low down payment type of lending” that are most affected.
FHA mortgages, as well as mortgages backed by the Veterans Administration, allow homebuyers to purchase properties with small down payments — as little as 3% for an FHA loan or none for a VA loan. It helps low-income buyers, who usually don’t have much money left over for a down payment, but becomes a liability when home prices fall sharply, leaving people stuck in their homes .
“Unfortunately, those who are the first to be affected when home values go down can’t do much,” said Selma Hepp, principal economist at CoreLogic.
Being underwater becomes a bigger problem when homeowners have trouble paying off their loans – a data point that is on the rise.
“You’re looking at borrowers who took out mortgages in 2022 who became delinquent earlier,” Walden said. “They’re a little more spread out, you see higher debt-to-income ratios, and you’re seeing this increase in early-stage delinquencies. If you’re a delinquent, it becomes a problem,” he said. They said.
While both measures of distress are historically low, Walden says, they are both rising. With mortgage rates likely to continue rising as the Federal Reserve continues to raise interest rates, Walden worries more people will go underwater.
“I expect it to get worse,” he said. “As prices continue to soften, the expectation is that you can continue to see an increase in these underwater assets.”