Negative equity (a.k.a.: underwater or upside-down mortgages) applies to borrowers who owe more on their mortgages than their homes are currently worth. Fortunately for homeowners, skyrocketing home prices have greatly reduced the amount of underwater mortgages throughout the country. In fact, as of Q4 2021, just 1.1 million homeowners nationwide have negative equity. This is the lowest level that we have seen in over 12 years.
How much price appreciation?
Home prices rose 18% year-over-year in the fourth quarter of 2021. These gains come on top of an annual price appreciation of 8% in 2020. With 63% of U.S. homeowners having a mortgage, these gains are extremely beneficial for avoiding negative equity.
Although most estimates have home prices appreciating at a more modest pace for the remainder of this year, the first few months of 2022 have seen continued strong buyer demand resulting in more bidding wars.
Negative equity trends
As expected, skyrocketing home prices are allowing more homeowners to avoid negative equity. Below are some recent trends being observed:
- Quarter-over-quarter: From Q3 2021 to Q4 2021 the total number of mortgaged homes in negative equity decreased by 3% to 1.1 million homes, or 2.1% of all mortgaged properties.
- Year-over-year: As of Q4 2020, 1.5 million homes (2.8% of all mortgaged properties) were in negative equity. As of Q4 2021, this number decreased by 24.9% (approximately 380,000 properties).
- Distribution of negative equity: As of Q4 2021, 42% of negative equity loans had a loan-to-value ratio below 125% and 58% had a loan-to-value ratio of 125% or higher.
Summary
According to the CoreLogic Home Price Index, the 18% home price appreciation in 2021 is the largest annual gain recorded in its 45-year history. Thus, this has equated to record levels of home equity wealth. For low- and moderate-income homeowners, home equity has historically been a major source of wealth. Needless to say, these gains have been quite significant for most U.S. homeowners.
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