Equity risk isn’t exactly prize conversational material. It isn’t a term you’ll hear at the grocery store or when you’re picking up lunch or even at the gas station. But it’s one you need to be aware of because it could mean the unraveling of the Dallas housing market.
So let’s dive deep into this issue of equity risk. We’re going to talk about what it is, who has this risk, and what are they at risk of? Oh and stick around to the end because we’re going to talk about how this could literally sink the entire Dallas housing market.
What is equity risk?
Before we get too deep (pun intended!) into this conversation about underwater homeowners and equity risk, let’s talk about what those terms actually mean. As you might have guessed by now, a person who has equity risk means they’re underwater on their home. Money.com describes it this way, they say “a home is underwater when the owner owes more on the mortgage than the home is actually worth.”
You may have also heard it called being ‘upside down’. This happens when the value of the home depreciates to a lower amount than what the owner originally bought it for. Now the homeowner has equity risk because if they can no longer afford their home, they can’t afford to sell it either because they owe more on it than it would sell for.
So who are the homeowners most at risk of going underwater?
Unfortunately, according to money.com, “The risks posed by falling home values are greatest for people who bought houses within the past year or so” In their October Mortgage Monitor, Black Knight comments on the same dilemma saying how “a clear bifurcation of risk has emerged between mortgaged homes purchased relatively recently versus those bought early in or before the pandemic.”
The major home value increase we saw in 2020-2021 is resulting in many of those homes now having depreciated well below what their current owners bought them for. In fact, Black Knight goes on to say “Of all homes purchased with a mortgage in 2022, 8% are now at least marginally underwater and nearly 40% have less than 10% equity stakes in their home”
But that’s not the worst of it. Those who purchase their homes during that period with an FHA or VA loan are at even greater risk. “More than 25% of 2022 FHA/VA purchase mortgage holders have now dipped into negative equity, with 80% having less than 10% equity” When compared to equity “risk among earlier purchases”, those buyers’ risk “is essentially nonexistent”
So what exactly are these buyers at risk of? Won’t equity just build up over time? Why is this a big deal?
Well for starters, if something goes wrong and the owners can no longer afford their home or they need to move, they can't sell their home without losing money. Think about all the simple possibilities that could lead to making less money or having more expenses.
Although unemployment numbers are currently low, the Fed has actually said they NEED unemployment to increase in order to lower inflation. And we all know what happened the last time the Fed decided they needed to ‘fix’ something.
In fact, according to CBS News, “The Fed forecasts the unemployment rate to rise to 4.4% next year, from 3.7% today — a number that implies an additional 1.2 million people losing their jobs.” On the other hand, we know none of these buyers’ mortgage rates will go up. Remember, these homeowners all have 3% fixed rate mortgages.
But what part of their monthly expenses could go up? Well home repairs for one. In the raging chaos of the seller’s market many buyers were skipping the inspection period altogether and they weren’t asking the sellers to fix anything.
The biggest risk, though, are rising property taxes. Actually, I have been concerned for quite a while that this will wreak havoc on the Dallas housing market. I even discussed it in this video that I made eight months ago.
Why am I so concerned about property taxes in Dallas?
Property taxes here are evaluated in the spring and the bills go out in the fall. Now homeowners CAN protest these values but the 2022 homeowners we’ve been discussing aren’t going to have a leg to stand on because the values are probably going to increase to what they paid for the home.
The brunt of this impact isn’t really going to be felt until the fall of 2023 when homeowners begin receiving their property tax bills and being notified that they have an escrow shortage. And here’s where the crisis will really hit: if these homeowners can’t afford the taxes on the home and need to sell, they can't. They don’t have enough equity to sell!
What does this mean? How can I prepare?
One of the best things you can do to prepare is stay up to date on the current trends of the market so you can be prepared for what’s coming. And how can you do that you may ask? Well keep reading our blogs of course!
But what does this mean for the Dallas market NOW you ask? Most likely an increase in foreclosures. Black Knight shares, how, “while still relatively low…the early-payment default” Or EPD, “rate – which captures mortgages that have become delinquent within six months of origination –– has risen among FHA loans for much of the past year to reach its highest level since 2009”
What do foreclosures mean?
With an increase in foreclosed upon houses comes an increase in supply of homes for sale and with an increase of for sale homes supply always comes lower home prices. On top of that, prices will also be driven down because foreclosures sell for less and the other homes for sale will have to compete.
So where does this leave us?
We’re currently at a perilous balance between the current low supply and unaffordability and the prospective future’s increase in supply and low prices.
Right now, the general unaffordability should be causing home values to plummet but they’re not because we have a supply shortage. With the ever increasing Dallas population, Black Knight states, “what would ordinarily be an environment ripe for steep declines in home prices has been offset somewhat by stagnant levels of for-sale inventory.”
Realtor.com also comments saying, “There is a dire shortage of properties for rent and sale with many more buyers and renters than there are available homes. That keeps a floor under prices, preventing them from falling too far.”
However, if foreclosures increase supply it could tip that balance. So in the end, equity risk isn’t just about these 2022 homeowners, it puts everyone involved in the Dallas housing market at risk.
A property tax crisis could truly upend the market this fall but what about right now? What shocking things are happening in the market at this very minute? Well If you want to know that you’re definitely going to want to check out this video. In the meantime, Wendy out!