The home equity losses are here.
US homeowners with mortgages (around two-thirds) suffered more than $108 billion in collective losses in Q1 compared to the same period a year ago, according to CoreLogic figures released on Thursday.
That sounds like a lot, but it’s actually a drop in the proverbial bucket. It works out to just $5,400 per borrower, and the worst of the declines were concentrated in Western states, where annual losses were quite large.
Of course, long-time homeowners in some areas which experienced large declines from Q1 2022 to Q1 2023 are still (more than) fine thanks to year after year of huge gains.
Prior to the pandemic, the average US homeowner had $182,000 in equity. That figure is now $274,000. And we wonder why consumer spending refuses to submit in the face of aggressive rate hikes. All else equal, the typical homeowner is $100,000 richer in net worth terms versus pre-plague levels. Depending on your 401(k) allocation, you’re up more than that. The vast majority of home loans are obviously fixed-rate.
As a brief aside, it’s worth noting that even in economies where homeowners actually have to worry about rising rates, home prices and housing activity are picking back up, compelling policymakers to restart rate hikes.
US home prices (both existing and new) recently posted YoY declines for the first time in over a decade, so it’s not surprising to see home equity losses. Given the dearth of resale inventory set against still strong demand, it’s certainly possible that the price declines will prove fleeting. And yet, would-be buyers are beset on both sides of the affordability equation. 80% said it’s a bad time to buy a home in the May vintage of the University of Michigan’s sentiment survey.
If the US economy were to fall into recession and job losses were to mount, the onerous cost of homeownership, combined with inflation running double the Fed’s target, could pretty easily undercut demand and thereby prices.
For now, though, the only people “ouching” (to quote Prince Abdulaziz bin Salman) are those who bought at the wrong time, in the wrong place with small down payments. “[H]omeowners in some areas of the country who bought a property last spring have no equity as a result of price losses,” CoreLogic Chief Economist Selma Hepp remarked.
But even there, if you locked in, say, March of 2022 (or even in early April of last year), you’re probably not feeling too bad about things in light of subsequent developments on the rates front. If projected gains for prices over the next year pan out, barely-underwater borrowers will be on the right side of the equation again, and sitting happily with a four-handle mortgage to boot.
Recall that prices have already inflected. Both Case-Shiller home price indexes posted solid monthly gains for March, as did the FHFA index, which rose a third month. Apropos, average home equity rose on a QoQ basis in Q1, CoreLogic said.
Negative equity rose nearly $35 billion YoY to $336.7 billion at the end of Q1. As a percentage, aggregate negative equity peaked in Q4 of 2009, at more than a quarter of mortgaged residential properties.
Remember the story, money isn’t real, investments aren’t real unless we all believe the story. An extra 100k can be borrowed against the imputed equity right now, but only at a rate probably higher than the rate on our collective first mortgages. Also, if we want to spend our equity we have to find a bank willing to lend to us. This could be a bit dicey until someone tells banks what the new capital requirements are going to be. Wells has already announced no new mortgage loans except to existing customers.
There are a LOT of younger Millennials and Gen Zers- who are currently in the age range of 25-30 who are not even trying to save for a down payment on a home. Up until the past few years, this was a primary goal of many people in that age range.
Now, due to the crazy high cost of homes, the people in the 25-30 age group are going out to bars and restaurants instead of staying home and saving for a down payment.
Have you been out on the town lately? Bars and restaurants are quite busy where I am.
Count me among those who bought a home out west in March of last year. Our house is undoubtedly worth less than what we paid, but to your point, we locked in our mortgage just as rates were beginning their ascent. Frankly, I’d prefer prices remain flat or down as we’ll likely upgrade in the next 5 to 10 years as our kids get older and we need more space. We’ll likely hold onto our existing home as a rental property, so the price fluctuations don’t mean much to us at this point.
I am curious what will happen to Bay Area prices as more companies start pushing for a return to office and a bunch of new generative AI companies start springing up. As nice as remote work is (and I am currently remote myself), it’s still better career-wise to be where the action is and the Bay Area is still by far the best place to be in tech.
The Fed gave and gave and now they’re taking and probably will continue with higher rates as the party is definitely not over yet.