The report by mortgage data firm Black Knight also found that 1 million others who bought homes in the first nine months of the year have “limited equity,” owning less than 10%.
The findings reflect a real estate market that has seen home prices cool in recent months amid a period of rapidly rising mortgage rates.
“A clear bifurcation of risk has emerged between mortgaged homes purchased relatively recently versus those bought early in or before the pandemic,” Ben Graboske, president of Black Knight Data & Analytics, said in a news release.
Graboske noted that negative equity rates are still far below historic averages and the pace of cooling has slowed recently.
Those who purchased homes at the peak of the market between May and July are the most likely to have equity challenges today. About one in three homebuyers in July now face negative equity, or limited equity (owning less than 10% of their home), Black Knight found.
But that doesn’t mean it’s time to panic. Most recent buyers will simply wait and hope their home’s value bounces back by the time they’re ready to sell.
“For most people, these changes have no immediate economic impact,” said Laurence Kotlikoff, an economics professor at Boston University.
Others in the industry pointed out that even limited equity provides an upside that the alternative does not.
“Housing is not a short-term investment and renting doesn’t build any equity at all,” said James Martin, who will serve as the chair of the Federal Finance & Housing Policy Committee for the National Association of Realtors in 2023.
Black Knight found that borrowers backed by the Federal Housing Administration (FHA) or Veterans Affairs (VA), which are popular among first-time and low-income buyers, were more likely to have fallen underwater. More than 20% of those loans that originated in 2022 are “marginally underwater.”
But veterans and buyers with FHA mortgages also have a slight advantage in a higher-rate environment because of assumable loans, which allow them to sell their houses at the rates they purchased them at, Martin pointed out.
Martin said the recent drop in mortgage rates, which have fallen since hitting a 10-year high in early November, suggests home values will increase and equity fears “will be less of a concern” going forward.
There’s something else working in homeowners’ favor: a shortage of inventory.
The overall market remains about half a million listings short of what would be considered normal, Graboske noted. That reality has counterbalanced other factors that may have otherwise dragged home prices down further.
Today, the median home price is 3.2% off its June peak but with interest rates higher than they’ve been for most of the year “affordability remains perilously close to a 35-year low,” Black Knight found.