Black Knight Mortgage Monitor: "Total market leverage was just 42% of mortgaged homes’ values, the lowest on record"

"Tappable equity is now down 5% in the last two months"

Most homeowners have a significant amount of equity and will not be “underwater” if house prices decline. This is an important difference compared to the housing bubble when many millions of borrowers had little or no equity even before house prices declined. As Black Knight notes in their monthly Mortgage Monitor report released this morning:

Overall, the market is on strong footing to weather a correction; total market leverage as of Q2 – including both first and second liens – was just 42% of mortgaged homes’ values, the lowest on record

Press Release: Black Knight: Against Sharpest Monthly Home Price Drop in 11 Years, Tappable Equity Backs Off Q2 Peak; Six of 10 Most Equity-Rich Markets Decline Through July

Today, the Data & Analytics division of Black Knight, Inc. (NYSE:BKI) released its latest Mortgage Monitor Report, based upon the company’s industry-leading mortgage, real estate and public records datasets. The most recent data from the Black Knight Home Price Index shows the deceleration in home price growth on which the company has been reporting in recent months has shifted to actual decline. As Black Knight Data & Analytics President Ben Graboske explains, July’s month-over-month decline represents the first such contraction in nearly three years.

“After 31 consecutive months of growth, home prices pulled back by 0.77% in July,” said Graboske. “Annual home price appreciation still came in at over 14%, but in a market characterized by as much volatility and rapid change as today’s, such backward-looking metrics can be misleading as they can mask more current, pressing realities. Case in point – this cooling has been indicated in our home price data for several months now, and at an increasing pace. In January, prices rose at 28 times their normal monthly rate before slowing to five times average in February as interest rates began to tick up. Even May was still about two times normal, before June growth came in 70% below the long-run average. And all the while, annual appreciation continued to appear historically strong, showing double-digit growth month after month. Without timely, granular data, market-moving trends don’t become apparent until they’re right in front of you – like a sudden shift to the largest single-month decline in home prices in more than a decade.

“Similarly, while mortgage-holders’ tappable equity had grown 25% from last year to hit yet another record high in Q2, we noted that equity actually peaked in May and tracked the pullback that began in June before escalating in July. Tappable equity is now down 5% in the last two months, setting up Q3 to likely see the first quarterly decline in tappable equity since 2019. Some of the nation’s most equity-rich markets have seen significant pullbacks, most notably among key West Coast metros. From April through July, San Jose lost 20% of its tappable equity. Seattle followed, shedding 18% of tappable equity over that same three-month span. Likewise, San Diego (-14%), San Francisco (-14%) and Los Angeles (-10%) have all seen double-digit declines since April. Keep in mind that of the roughly 275K borrowers who would fall underwater from a 5% price decline, more than 80% purchased their homes in the first six months of 2022 – right at what appears to have been the top of the market. With prices continuing to correct and our McDash HELOC data showing home equity lending at its highest level in 12 years, we will keep a very close eye on equity positions in the coming months.”  
emphasis added

On “Tappable” Equity

The first graph shows Black Knight’s estimate of tappable equity.

• Tappable equity – the amount a homeowner can borrow against while keeping a 20% equity stake – hit its 10th consecutive quarterly record high in Q2 2022 at $11.5T but appears to have peaked in May of this year

• Escalating declines in June and July have total tappable equity down 5% over the past two months, suggesting a sizeable reduction is likely in Q3, which would mark the first quarterly decline in three years

• Overall, the market is on strong footing to weather a correction; total market leverage as of Q2 – including both first and second liens – was just 42% of mortgaged homes’ values, the lowest on record

Equity Withdrawals by Transaction Type

With the sharp increase in mortgage rates, refinance activity has declined sharply. Borrowers are now using home equity lines of credit more often, as opposed to refinancing their existing mortgage.

• Rising interest rates have not only affected how much equity is being withdrawn from the market, but how borrowers are withdrawing equity as well

• Mortgage holders withdrew an estimated $127B in Q2, equivalent to just 1.1% of tappable equity at the start of the quarter, the lowest such share dating back to 2005

• While withdrawals via cash-out refinances fell by 30% from Q1, preliminary data from the Black Knight home equity database suggests home equity lending was up nearly 30% quarter over quarter, the largest volume in nearly 12 years

Mortgage Delinquencies Near Record Lows

Here is a graph on delinquencies from Black Knight. Overall delinquencies are near record lows.

• The national delinquency rate edged up 5 BPS in July to 2.89%, only 14 BPS higher than the record low set in May of this year, and remains historically strong

• The number of borrowers a single payment past due rose 4%, while 90-day delinquencies retreated to below May levels after a slight uptick in June

• Despite seeing early-stage delinquencies rise in 10 of the past 12 months as the market slowly returns to normal, the number of borrowers a single payment past due is still 28% below pre-pandemic levels

There is much more in the mortgage monitor. For example, Black Knight also has data on the status of mortgage loans that were in forbearance.