BAM’s Key Details: 

  • Black Knight’s latest Mortgage Monitor report shows 8% of homes mortgaged in 2022 are underwater
  • Over 25% of FHA/VA mortgage holders have dipped into negative equity; 80% have less than 10% equity
  • Housing affordability is close to a 35-year low, yet foreclosures remain new record lows

Black Knight, Inc. has released its newest Mortgage Monitor Report, which shows 8% of homes mortgaged in 2022 are underwater after four straight months of home price pullbacks. 

But with inventory still low and mortgage rates putting a damper on new listings, the size of those monthly pullbacks has been shrinking. 

Black Knight Data & Analytics President Ben Graboske explains how today’s mortgage rates have actually contributed to the slowdown in home price declines—and what it means for housing affordability. 

We’ve now seen four consecutive months of home price pullbacks at the national level. But after a couple of significant drops earlier in the summer, the pace of cooling has slowed considerably, with October’s non-seasonally adjusted drop of just 0.43% the smallest decline yet. Though seemingly counterintuitive, the much higher rate environment may be limiting the pace of price corrections due to its dampening effect on inventory inflow and subsequent gridlock in home sale activity. While the median home price is now 3.2% off its June peak – down 1.5% on a seasonally adjusted basis – in a world of interest rates 6.5% and higher, affordability remains perilously close to a 35-year low…

Ben Graboske

Black Knight Data & Analytics President

Smallest home price decline in months

While home prices have been pulling back since they peaked in June, October’s 0.43% decline (seasonally adjusted to a 0.13% drop) has been the smallest of the four consecutive monthly drops.

Annualized home appreciation slowed in October to 9.3% from September’s 10.7%, making it the seventh consecutive monthly decline but also the smallest since May. 

Behind that shrinking decline is the largest deficit in new listings in six years (excluding March and April 2020, when much of the U.S. was in lockdown), with October’s sitting at 19% (-94K) below 2017-2019 pre-pandemic levels.

That shortfall leaves the overall market over half a million listings shy of what experts would consider “normal” by historical measures.

8% of homes purchased with a mortgage in 2022 are underwater

Even with that slowdown in home price appreciation, equity risk remains for home mortgages purchased in 2022. According to Black Knight’s report, 8% of those purchased this year are at least marginally underwater, and 40% have less than 10% equity in their home. 

Of the 450K underwater borrowers at the end of Q3, the mortgages of nearly 60% had been originated in the first nine months of 2022 – and these were overwhelmingly purchase loans.

Ben Graboske

Black Knight Data & Analytics President

Negative equity rates across all mortgaged properties sit at 0.84%, which, by historical standards, is extremely low. 

The numbers get worse for FHA and VA loan borrowers, with more than 25% now in negative equity and 80% having less than 10% equity. 

Early-payment defaults—loans that go delinquent within the first six months—have increased among FHA borrowers over the past 12 months and have now reached their highest level since 2009 (excluding the earliest months of the pandemic).

Equity risk remains minimal for those who purchased a mortgage 12 or more months ago. 

3 reasons not to expect a flood of foreclosures

With the uptick in early-payment defaults, some are pointing to the flood of foreclosures that happened in the crash of 2008 and suggesting we might be in for another round.

But the number of actual foreclosures in today’s housing market is much lower, largely due to the following three reasons:

#1: Revised lending standards

Lending standards leading up to the last housing crash were more relaxed than they are now, allowing people to qualify for mortgages they ultimately couldn’t afford. Those distressed properties then made their way back onto the market, spurring a freefall in home values.

Lending standards today are much stricter, and far fewer homeowners fall behind on their mortgages.

Marina Walsh, Vice President of Industry Analysis at the Mortgage Bankers Association (MBA), corroborates this in a recent report:

For the second quarter in a row, the mortgage delinquency rate fell to its lowest level since MBA’s survey began in 1979 – declining to 3.45%. Foreclosure starts and loans in the process of foreclosure also dropped in the third quarter to levels further below their historical averages.

Marina Walsh

Vice President of Industry Analysis at the Mortgage Bankers Association

#2: Pandemic forbearance programs

During the pandemic, homeowners dealing with financial uncertainty could pause their mortgage payments using the forbearance program, giving them the time and breathing space they needed to get their finances in order and, if necessary, work out a plan with their lender.

Many speculated that this program would lead to a flood of foreclosures when the forbearance period was over. But data from the New York Fed, shown in the KCM graph below, shows far fewer foreclosures happening today than prior to the pandemic.

So, while we’re seeing more foreclosures than we did last year (when borrowers could put their payments on hold), the number is still well below what we’ve seen in more typical years like 2017 through 2019. 

What’s even more telling is the difference between today’s number and the numbers seen during the market crash (the red bars in the graph below).


Source: KCM

#3: Most homeowners today have more than enough equity to sell their homes.

Another advantage today’s homeowners have, depending on when they purchased their mortgage, is that many have enough equity to sell their homes instead of losing them to foreclosure. 

With the rapid rise in home values over the past two years, the average homeowner gained record amounts of tappable equity, giving them a cushion against potential slippage in home values—and a protective barrier between housing distress and foreclosure.

A recent ATTOM Data report explains in more detail: 

Only about 214,800 homeowners were facing possible foreclosure in the second quarter of 2022, or just four-tenths of one percent of the 58.2 million outstanding mortgages in the U.S. Of those facing foreclosure, about 195,400, or 91 percent, had at least some equity built up in their homes.


Top takeaways for real estate agents

As a real estate professional, you want every client to be better off having worked with you than they were before. And in many cases, that will include the benefits of homeownership. 

But the more closely you work with each client, the better you are to gauge not only their willingness but their ability to manage the cost of a new home, which certainly involves but is not limited to the cost of their monthly mortgage payment.

Do what you can in every transaction to set your clients up for success in the long run, even if it means taking a step back to get a fuller picture before moving forward.