Homeowners lose wealth as rising interest rates weigh on home values

The once red-hot housing market is cooling quickly as high mortgage rates weigh on home values.

Mortgage rates doubled what they were at the start of the year as sales slowed down.

Home prices fell from June to July according to a report from Black Knight. It was the first monthly drop of any size in 32 months and the largest monthly drop since January of 2011.

Ben Graboske, president of Black Knight Data, wrote that the 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.

Roughly 85% of major markets have seen prices come off peaks through July, with one third going down more than 1%. Some homeowners lost equity after gaining trillions of dollars in home equity during the first two years of the epidemic.

So-called tappable equity, which Black Knight defines as the amount a homeowner can borrow against while keeping a 20% equity stake in the property, hit a new record high in the second quarter of this year. It might have peaked in May.

The decline in home values in June and July brought the total amount of tappable equity down by 5%, and given the weakness in the housing market, the third quarter of this year will show a bigger decline.

Some of the nation's most equity-rich markets have seen significant declines.

In the first half of the year, San Jose lost 20% of its tappable equity, followed by Seattle, San Diego, and San Francisco.

The last time the housing market went through a big correction, homeowners were flush. Home values plummeted in some major markets after the collapse of the mortgage market. Millions of people went underwater on their loans.

Today, that is not the case. Current borrowers owe 42% of their home's value on their first and second mortgage. The leverage is the lowest it has ever been. Those owners shouldn't be affected by losing value on paper.

About 275,000 borrowers would fall underwater if their homes lost 5% of their value. In the first six months of this year, more than 80% of the borrowers bought their homes.

Negative equity rates would not be close to the levels seen during the financial crisis even with a 15% decline in prices.