American homeowners falling into negative equity rose in the first quarter of the year as soaring living costs and a volatile property market strain households.
The number of mortgages considered ‘seriously underwater’ rose from 2.6 percent to 2.7 percent of all residential mortgages, a new report shows.
In Kentucky, the percentage of ‘seriously underwater’ mortgage holders rose to 8.3 percent in the first three months of the year – the highest of any US state. To hit the threshold, owners must owe at least 25 percent more than the estimated value of their home.
Louisiana, where house prices have fallen 2.8 percent in a year, has the largest share of troubled mortgage holders. Some 11.3 percent of home loans in the Pelican state are now seriously underwater, according to the latest data from ATTOM.
Wyoming followed with 8.8 percent of its mortgage holders hitting the threshold.
In Mississippi, 7.1 percent of mortgage holders are considered ‘seriously underwater’ while 6.1 percent in Oklahoma are.
Negative equity occurs when an individual’s outstanding mortgage balance is more than the value of their property.
In a strong market, homes should appreciate in value over time – meaning borrowers have little risk of falling into negative equity.
However, when prices start to fall and interest rates rise, those with small down payments are at greatest risk of ‘going underwater.’
Falling into negative equity can make it difficult to sell or refinance a home – leaving many feeling trapped in their property. The issue exploded into a crisis during the 2008 financial crash when house prices plummeted overnight.
And now borrowers face a similar issue as the red-hot property market of the last two years begins to cool while mortgage rates sit at 7.09 percent for a 30-year fixed term, according to the latest data from Freddie Mac.
Home loans have been pushed up by the Federal Reserve’s aggressive tightening cycle which has driven interest rates to a 23-year-high.
The number of mortgage holders slipping into negative equity has increased
Homeowners with a loan to value ratio of 125 percent or more rose to 2.7 percent
Despite this, house prices have remained surprisingly buoyant as those with cheaper fixed-rate mortgages have opted not to move, and housing supply constraints have kept demand high.
But families are facing their highest living costs in recent memory as inflation remains at 3.5 percent, possibly leading to more mortgage defaults.
ATTOM also found a decline in the percentage of mortgage holders considered to be ‘equity-rich’ for the third quarter in a row.
Homeowners with a loan-to-value ratio of 50 percent or lower fell to 45.8 percent in the first quarter of the year, down from 46.1 percent in the previous quarter.
The figures represent the lowest level of equity-rich mortgages in two years, according to ATTOM.
The property market ‘windfalls are starting to erode bit by bit amid mounting signs that the market is no longer so superheated’ ATTOM CEO Rob Barber said of the reports findings.
He added: ‘It’s too early to make any broad statements about the market direction, especially coming off the typically slower Fall and Winter months.
‘But amid the recent trends, this year’s Spring buying season will be of heightened importance in telling us if there is a new long-term market pattern developing.’
