Home Equity Takes a Dive While Underwater Mortgages Catch A Breath

The portion of mortgaged homes that are equity-rich slipped at its fastest pace in at least four years, but the number of loans that are seriously underwater improved in the third quarter, according to real estate data firm ATTOM's 2023 U.S. Home Equity & Underwater Report.

The report found that 47.4% of mortgaged residential properties in the U.S. were considered equity-rich in the third quarter, down from 49.2% in the second quarter — the largest quarterly decline since at least 2019, according to the report. It's also down from 48.5% in the third quarter of 2022.

The declines occurred despite home values rebounding from a fallback that lasted from mid-2022 to the early part of this year. Even though equity-rich levels dropped, the report also found that the portion of seriously underwater mortgaged homes continued to improve.

"By all measures, homeowner equity around the country remained strong during the third quarter as millions of households kept benefitting from the nation's extended runup in home values. At the same time, though, we saw an unusual downturn at the equity-rich end of the spectrum," ATTOM CEO Ron Barber said.

While it could have been a temporary blip, it also could have reflected an increase in long-time owners who had a lot of equity built up selling their homes or borrowing against their rising wealth and slipping out of equity-rich territory, Barber said.

The conflicting equity trends come as the housing market continued to recover from the downturn that threatened to end the 10-year run of price and equity growth.

The median single-family home price increased 11% over the second and third quarters this year after an 8% decline from mid-2022 to early 2023. The job market is strong, with the national unemployment rate at less than 4%, and inflation down to less than half the level of a year ago.

Home prices continue to rise because of the ongoing tight supply. More uneven equity trends could continue as mortgage rates continue their upward trend toward 8% for a 30-year loan and the housing market enters its slow season, which usually results in smaller price increases or declines.

"The fourth quarter should say more about whether residential equity in the U.S. has indeed tapped out," he said.

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