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Homes Underwater – Is Yours One of Them?

Nearly 10% of Homes Purchased in the Last 9 Months Are Underwater on Loans

As the leaves begin to fall and the temperature drops, the housing market tends to follow suit, entering into its traditionally slower season.

But this year, the housing market is facing challenges that go beyond the usual seasonal downturn.

Housing prices have been on the rise for the past several years, reaching dizzying heights in some markets. This led to a surge in demand, with buyers willing to pay top dollar just to secure a home.

But as prices started to fall, it left many buyers in a difficult position.

According to data from Black Knight, nearly 10% of homes purchased in the last nine months are now partially underwater on their loans, meaning they owe more on their mortgage than their home is worth.

For some borrowers, this decrease in equity can be particularly concerning.

The Federal Housing Administration (FHA) offers loans with low credit score requirements and smaller down payments, making homeownership more accessible to a wider range of people. However, these loans can also be riskier in a declining market.

If housing prices continue to fall, many FHA borrowers could find themselves in a precarious position, with limited or even negative equity.

According to data gathered from Graham Stephan, a real estate expert and popular influencer, in some locations, such as Colorado Springs, Honolulu, and Riverside, California, more than 20% of homes have limited or negative equity. And nearly two-thirds of FHA borrowers have less than 10% equity.

If the market continues to decline, these borrowers may be at greater risk of default.

But it’s not just FHA borrowers who are feeling the pinch.

With housing prices dropping an average of 7.6% in Q3, the largest decline since 2009, many new homebuyers are now underwater on their loans. And with the housing market entering its slower season, those who can least afford it may be the hardest hit.

Redfin data shows that 2% of homes are being taken off the market each week in November, which is twice the seasonally adjusted average. And with weaker consumer spending and excess inventory, national rents have dropped by 1% in November.

Despite these challenges, it’s important to remember that delinquency rates are still historically low.

Delinquency, or the percentage of borrowers who are behind on their mortgage payments, is primarily restricted to those with a credit score of 680 or below. So while the housing market may be facing some headwinds, it’s not all doom and gloom.

As we head into the winter season, it’s important for buyers and homeowners to be mindful of their financial situations and take steps to protect their equity.

Whether you’re in the market for a new home or trying to hold onto the one you have, it’s always a good idea to stay informed and be prepared for whatever the market may bring.

What do you think about the hosuing market heading into 2023? Tell us in the comments and we will get back to you with an up update.

This news post was inspired by Graham Stephan. Make sure to check out his content for all things real estate investing.

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