270,000 homeowners who bought last year owe more than its worth

About 270,000 homebuyers who bought during the red-hot housing market this year already owe more than their house is worth, a new analysis found.

Among the 450,000 underwater borrowers in the third quarter, nearly 60% had mortgages originated in the first nine months of 2022, Black Knight found. That's about 1 in 12 homes purchased in 2022 with a mortgage, or 8%. Nearly 40% of homes bought this year have less than 10% of equity left to tap.

The figures reflect yet another fallout from rapidly rising mortgage rates this year, which have put pressure on housing values as home price growth cools at a record pace month over month.

“Though the home price correction has slowed, it has still exposed a meaningful pocket of equity risk,” Ben Graboske, president of Black Knight data and analytics, said in a news statement. “Make no mistake: negative equity rates continue to run far below historical averages, but a clear bifurcation of risk has emerged between mortgaged homes purchased relatively recently versus those bought early in or before the pandemic.”

Should you Sell your Home now or Wait?

Unusual market conditions and dire predictions from some economists have many homeowners asking: should I sell my house now or wait until 2023? 

Typically, homeowners who list their homes in the spring can take advantage of higher buyer demand. In 2022, the National Association of Realtors pinned mid-April as the optimal week to sell a home. But most economists believe that affordability pressure from rising mortgage rates will continue to curb demand, causing prices to fall in many markets in 2023. So if you’re poised to sell, some experts contend that now is a better time than next year.

Let’s dig in a bit more on this question of whether now is a good time to sell a house — and what factors to consider when making your decision.

Why you may want to list your home now

The timing isn’t perfect, but it could get worse

The best time to sell is typically when buyer demand is high and interest rates and inventory are low. That ideal combination of factors made for a hot selling market in 2021, but conditions have since evolved. While mortgage rates decreased in December due to the expectation of slower rate hikes from The Fed, 30-year fixed rates are still hovering around 6.5%. 

High mortgage rates coupled with recession fears are keeping many prospective homebuyers out of the market. Essentially, the best time to sell has already passed, and many believe we’re moving toward worsening conditions for sellers. “It's unlikely that selling conditions will improve in any meaningful way over the course of 2023,” says Dave Meyer, VP of Data and Analytics at BiggerPockets and author of Real Estate by the Numbers.

The Federal Funds Rate is still climbing

“If you have to sell your house, you should do it now,” says Armstead Jones, Strategic Real Estate Advisor for Real Estate Bees. “Mortgage rates aren’t going down and actually may go up. Something important to remember is once you sell your house, you then have to find a house to buy.” The Fed has signaled that rate hikes will continue, even if they won’t be as steep — and mortgage rates tend to follow the federal funds rate. 

The good news is, home values skyrocketed over the course of the pandemic, so selling now is likely a wise financial decision. “Despite prices coming off their June peak, most homeowners stand to make large profits if they sell their home, even in today's market,” says Meyer. 

Most economists believe prices will fall

Rising mortgage rates not only have the effect of making your new mortgage payments less affordable, but also shut many would-be buyers out of the market. Lower demand means less competition for your home, which affects the sale price you can reasonably hope to achieve. If these effects are widespread, when will the housing market crash? 

Economists at Wells Fargo, Capital Economics, Goldman Sachs, and many other firms believe housing prices will start falling in 2023. If a recession takes hold, some experts predict prices could fall as much as 30% in highly overvalued markets. Even those who are more optimistic expect the market to shift to benefit buyers. If you’re considering selling in the next year, housing market predictions indicate that selling now could allow you to capture a higher price. 

Why you may want to wait to sell your home

You’re trading up for a bigger home

“If you're looking to trade up to a bigger home, this is a tough market to do that. Affordability is low, and you'll likely be paying considerably higher monthly mortgage payments on a trade up, even to move to a slightly bigger home,” says Meyer. If the monthly mortgage payments on a bigger house are unaffordable, you may have to stay put a little longer. 

You’re not in any rush to sell

“Two years from now will be a better time to sell. The market and inflation will be resolved,” says Jones. Many economists are expecting home prices to rebound by 2025. Mortgage rates are likely to come down by then as well, making it easier for you to afford your new home. 

Bottom line

For most homeowners, now will be a better time to sell than 2023. That’s especially true if you live in a market that saw rapid appreciation in recent years. Your real estate agent can help you understand pricing trends in your area, along with available inventory and demand. Waiting until spring may not be a bad idea in markets where prices are expected to remain flat or grow. But if you can hunker down and wait until 2025, you may realize even better outcomes. 

Redfin Demand index ticked up this week as rates decline

Redfin's Homebuyer Demand Index ticked up this week as steadily declining rates lured some buyers back in. But many would-be buyers are waiting for lower rates and prices, with the typical home's time on market rising at its fastest annual pace on record and supply increasing.

—The total number of homes for sale increased 15% year over year during the four weeks ending December 4, the biggest uptick since at least 2015, according to a newreportfrom Redfin (redfin.com), the technology-powered real estate brokerage.

New listings declined by more than 20%, which means homes are sitting on the market as prospective buyers stay on the sidelines and wait for mortgage rates and home prices to decline further from their peaks. That's also evidenced by a slowing market: The typical home that sold was on the market for 37 days, up from a record low of 17 days in June and up from 28 days a year earlier, the biggest year-over-year slowdown on record. Just 30% of homes sold within two weeks, the lowest share since January 2020.

But Redfin's Homebuyer Demand Index is rebounding from its low point, up 5% from a week earlier, as mortgage rates continue to decline from their early-November peak. Rates dropped to 6.33% from 6.5% a week earlier, cutting the typical U.S. homebuyer's monthly housing bill by about $50.

"This week has been relatively calm and quiet as we approach the end of one of the most volatile years in housing history," said Redfin Deputy Chief Economist Taylor Marr. "But it's not over yet. Next Tuesday's inflation report is the 500-pound gorilla in the room, and the Fed's press conference the next day will bring us much more clarity on how soon and how quickly we can expect mortgage rates to come down in the new year. Since we expect only a small decline in prices next year, mortgage rates will dictate housing affordability, and as a result, demand and sales, in 2023. If rates continue declining, more buyers may wade back into the market, as they'll have lower monthly payments."

Home prices fell from a year earlier in 11 of the 50 most populous U.S. metros, mostly in California

Home-sale prices fell from a year earlier in 11 of the 50 most populous U.S. metros, six of which are in California. Prices fell 7.8% year over year in San Francisco, 3.6% in San Jose, CA, 2.2% in Los Angeles, 1.4% in Detroit, 1.2% in Sacramento and 1.1% in Pittsburgh. They declined less than 1% in Oakland, CA, Anaheim, CA, Austin, Philadelphia and Phoenix.

Although the decline was small, this marks the first time Phoenix home prices have fallen on a year-over-year basis since at least 2015, as far back as this data goes. It's the first time Anaheim prices have fallen since October 2019.

Pierce Housing market cooling off

Pierce County's housing market shows signs of cooling off

PIERCE COUNTY, Wash. — After months of rising prices, Pierce County’s housing market is finally leveling out.

Data from the Northwest Multiple Listing Service’s latest report shows closed sales year-over-year have declined for a third straight month.

The median closed sale price for a home in Pierce County was $555,000 in August, down from $575,000 in July.

While that’s still nearly 8% higher from the same time last year, the trend may be good news to those looking to finally buy a home.

“It’s the best time we’ve seen for a buyer in a very long time,” said Regina Madiera-Gorden, a managing broker of Windermere Abode Lakewood.

One contributing factor to the shift could be a larger selection of homes, as more properties stay on the market.

“Up until about May, 80% of the homes were selling in four days or less around Pierce County,” Gorden explained. “Now, if you look at pending homes, you’re seeing more stay for 20 days and 30 days.”

NWMLS data shows Pierce County’s housing inventory has grown over 112% since this time last year.

“We have more inventory now than we’ve had in three and a half years,” Gorden said. “We’ve really seen that in all the price ranges.”

Gorden says this gives buyers more to work with and a bit of breathing room to negotiate, and while interest rates have crept higher in recent months, they remain historically low.

“You have some time to make a decision. You have an opportunity to do your due diligence when it comes to the home and the neighborhood,” she said.

But Gorden also advises that just because Pierce County’s market has slowed down a bit doesn’t mean buyers can afford to wait too long.

“Just because market times are longer doesn’t mean it’s going be there for a long time. So get out, see the inventory with your agent, it’s good to be proactive in the process, but it’s a great opportunity to get it done.”

Seattle Market slowing due to rates

The mortgage market is highly driven by movements in interest rates. Higher interest rates increase the cost of financing across all different segments of the real estate market. For many individuals and businesses, an increase in interest rates is significantly impacting affordability and investments in the market.

Homeowners locked into fixed mortgage rates are temporarily exempted from higher mortgage rates until their mortgage terms expire and they need to renew their housing loans.

However, mortgages with variable and adjustable rates are already experiencing a shift in the composition of their monthly payments toward their principal and interest rates. A careful review will show that with variable mortgages, although monthly mortgage payments may remain the same, a higher percentage goes toward mortgage interest rates compared to principal repayments.

Regarding stress tests, the Canadian government requires most financial institutions to assess the ability of new home buyers to afford their mortgage payments. The stress test uses a qualifying rate that is typically higher than the mortgage contract rate. As of 2022, the qualifying stress test rate is the greater of the mortgage contract rate plus 2% or 5.25%.

A higher interest rate limits the value of homes banks can approve for potential buyers. It is already more difficult to qualify for a home purchase when interest rates are high. The stress test factoring an additional 2% into the current high mortgage rates exacerbates the housing affordability concern.

Homeowners who need to refinance their mortgages, switch to a new mortgage lender, or even take out a home equity line of credit are also impacted by increasing interest rates in the mortgage market. Renewing a mortgage in these times will increase your out-of-pocket home expenses, leaving you with less disposable income.

With five-year fixed mortgage rates reaching new heights, closing a new mortgage will have significant financial implications for the average Canadian.

In addition to higher interest rates, the competitive real estate space is pricing Canadians out of the market. Recent reports show that home sales declined by 3.9% in September compared to August, and newly listed properties fell by 0.8%. The housing market statistics are not surprising, given that the new housing price index is up by 6.3% compared to last year.

Inflation rates are still high; the consumer price index (CPI) was 6.9% year over year in September. Although the rate was down compared to August, it is still high compared to the 4.4% level in 2021. With the government of Canada’s target inflation rate being 2%, interest rates may continue to increase.

Reaching a record high of 3.75%, the policy interest rate has increased by 350 basis points in 2022, albeit gradually over six months since March. With the new interest rate announcement and Monetary Policy Report on October 26, the current situation around inflation, exchange rate risks and global disruptions suggests that the Canadian government will continue to combat higher consumer prices with quantitative tightening via interest rates.

That being said, the interest rate adjustments could either be accelerated or dampened depending on the outturn of inflation in the coming months. The Bank of Canada increased the rates by only 50 basis points in October, lower than the 75 basis points market analysts expected.

The continuous increase in prime lending rates will keep impacting the mortgage market directly. However, there are a lot of uncertainties and how consumers react to the housing market depends on the underlying economic policies and how lenders respond accordingly.