Surging mortgage rates aren’t just raising the cost of purchasing a new home. An alarming number of recent home buyers have discovered they already owe more on their property than it’s worth, according to a new analysis.
Some 250,000 people who took out a mortgage this year to buy a home are now underwater, meaning they owe more on their loan than the home is worth, Black Knight, a mortgage software provider, found. Another million have less than 10% equity.
Those unlucky home buyers got caught in the crunch between historically high housing prices and rapidly rising mortgage rates, which in recent months have caused real estate values to slide.
All told, 8% of mortgages taken out this year are underwater — about one in 12 homes purchased in 2022.
The jump in mortgage rates this year has played a part. Rates have more than doubled this year, rising to an average of 6.3% — a multi-decade high — weighing on home sales and prices.
Although it’s not unusual for new homeowners to be underwater for a brief period, especially if they buy during the summer when prices are elevated, “It is much more pronounced this year than it normally is because prices are starting to cool,” said Andy Walden, Black Knight’s president of enterprise research. The portion of underwater borrowers tripled in October, he noted.
The situation is much worse for home buyers who purchased with government-backed mortgages, with 25% of those buyers this year now underwater, according to the report.
In Colorado Springs and Honolulu, more than 30% of mortgaged homes bought this year are underwater. In Virginia Beach, about 22% are worth less than what is owed. The 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.
FHA mortgages, as well as mortgages backed by the Veterans Administration, allow home buyers to buy property with small down payments — as low as 3% for an FHA loan or none for a VA loan. That helps lower-income purchasers who typically don’t have much money saved for a down payment, but it becomes a liability when home prices fall rapidly, keeping people stuck in their homes.
While this trend is clearly not as dramatic as 2008, it is something that should be monitored over the next 12-18 months.