Price corrections are coming to housing markets across the United States, Black Knight said following July’s home price decline from June. Relatedly, tappable home equity is expected to pull back in the third quarter as equity-rich markets already saw declines in July.
Home prices in July slipped 0.77% from June, marking the largest single-month decline since January 2011, Black Knight said in its monthly mortgage monitor report. While July’s home price grew 14.5% year over year and the growth rate was more than triple the long run average, “such backward-looking metrics can be misleading as they can mask more current, pressing realities” in a volatile market, said Ben Graboske, data and analytics president at Black Knight.
Prices through July were only off peak levels by less than 1% nationally, more than 85% of major markets have seen prices come off their peak levels.
San Jose, California saw the most significant pullback, with the average home price now down 10% in recent months, followed by Seattle, Washington (-7.7%), cities in California including San Francisco (-7.4%), San Diego (-5.6%), Los Angeles (-4.3%) and Denver, Colorado (-4.2%).
According to Black Knight, the impact of home price declines is twice as pronounced on tappable equity levels, which is defined as the amount a homeowner can borrow against while keeping a 20% equity stake.
After hitting a 10th consecutive quarter record of $11.5 trillion in the second quarter of 2022, Black Knight expects tappable equity to drop in the third quarter, marking the first decline in three years.
Prioritizing home equity solutions in a rising rate environment
The 2022 housing market has been underscored by interest rate spikes and refi decline and lenders are working hard to adjust to new borrower trends. HousingWire recently spoke with Barry Coffin, managing director of home equity title/close at ServiceLink, about the ways lenders can capitalize on these trends by revving up their home equity solutions.
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With tappable equity climbing since the pandemic, nonbank lenders started rolling out home equity loans and home equity line of credit (HELOC) products, a space that has traditionally been dominated by depository banks.
Rocket Mortgage and its wholesale arm Rocket Pro TPO started offering home equity loans in August. Guaranteed Rate introduced a digital home equity line of credit (HELOC), a revolving line of credit that allows borrowers to draw, for two-to-five years last month. loanDepot and New Residential Investment Corp. plan on launching HELOC products.
Already, escalating tappable equity declines in June and July have the nation’s total tappable equity down 5% over the past two months, Black Knight said.
The five most equity-rich West Coast housing markets, including Los Angeles and San Jose, California, shed between 10 and 20% of previously available tappable equity in July from April.
Overall, Black Knight believes the market is on strong footing to weather a correction. The total market leverage as of the second quarter – including both first and second liens – was just 42% of mortgaged homes’ values, the lowest on record.
A national home price decline of 5% would result in just 0.9% of homes becoming underwater, mostly impacting homeowners who bought their homes in 2022.
“While a loss in lendable equity would certainly impact overall household wealth levels and likely have downstream impacts on equity withdrawals and related spending, the housing market is in a strong position to absorb such price declines,” Black Knight said in its monthly report.
Purchase originations were down 4% year over year in the second quarter and are expected to fall 15% in the following quarter below pre-pandemic volumes in 2018 and 2019, according to Black Knight.
Refinance lending continued its decline in the second quarter with the number of refi originations dropping 50% from the first quarter and falling 70% year over year, marking the lowest quarterly total since the first quarter of 2019.
