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Trust This.
By Joseph E. Seagle, Esq. ● Sep 09, 2022
Smart Brevity® count: 1.5 mins...455 words
👋 Happy National 🐻 Teddy Bear 🧸 Day! For those of us who still have our childhood teddy bears, today’s the day to bring them out and give them a big hug.
Situation Awareness: There is still time to register for tomorrow’s Foreclosure Mindset educational event. You can use discount code #pcstitle when registering to save $200 off the registration fee.
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1 big thing: Homeowners' home equity is falling
Tappable equity, the amount a homeowner can borrow against while retaining a 20% equity stake in their home, is now declining after hitting its highest point at $11.5 trillion in the second quarter, peaking in May.
Why it matters: A home’s equity is often the largest asset that most people own. Over the past few years, as prices have risen, homeowners have felt security in seeing their nest eggs grow. Now that the equity is declining along with median prices, homeowners may lose that sense of security.
Annual home price growth moved from deceleration to decline in July when the median home price fell 0.77% from June, which is the largest single-month decline since January 2011, according to Black Knight’s July 2022 Mortgage Monitor.
Home equity levels are an important leading indicator for the economic health of future generations:
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A home’s equity is a source of generational wealth that is passed down from one generation to the next.
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While rents increase annually along with the rate of inflation, a home’s mortgage payment stays the same.
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Homeowners’ incomes may rise over time, meaning they have more disposable income each year to use for other things such as children, travel, education, and home improvements.
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Meanwhile, tenants are on a hamster wheel of rising rents that have been outpacing their wage increases, preventing them from accumulating additional reserves like a homeowner can do.
The bottom line: Homeowners' savings have been growing while their mortgage balance drops. But it has no effect on renters who are treading water.
Our thought bubble: Now that prices are dropping, pulling equity down with it, homeowners could start feeling more like renters, treading water.
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2. Flood maps are outdated
FEMA’s director this week said that flood maps used by federal agencies, the same ones used by insurance companies, surveyors, and mortgage lenders, are outdated in light of crazy amounts of rainfall caused by climate change.
Why it matters: Surveyors use federal flood zone maps to determine when homes and other structures are located in areas prone to flooding. Insurance companies then use those surveys to determine what flood insurance is required to repair or replace those improvements after a flood. In addition, mortgage lenders rely on insurance coverage to protect the asset that is collateral for the loan.
If the maps are inaccurate based on current weather patterns, then homes will be destroyed by floods but there is no insurance to repair or replace them, meaning that homeowners and their lenders can lose it all.
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I wrote about this issue from a different angle almost a year ago.
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The new Risk Rating 2.0 covered in that edition would incorporate other private data, models, and actuarial science.
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However, no risk rating will be applied if a property doesn’t appear to be in a flood zone from the outset.
State of play: Regular homeowners’ hazard insurance doesn’t cover rising flood waters. Flood insurance is a separate policy that covers such catastrophes, and the policies are backed by the federal flood insurance program. Mortgage lenders require this additional insurance whenever a home is located in a flood zone, and it can be very expensive.
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Recent heavy rainfall in Georgia, Mississippi, Missouri, Kentucky, and Illinois highlights the fact that current flood maps underestimate by 67% the number of homes and businesses that are in significant danger of a flood.
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Until the maps are updated, more homeowners will lose their homes to floods with no way to rebuild.
Go deeper: The Guardian
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3. News you missed: a housing slump, not a crisis
Photo Credit: Shiro Hatori
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The average home sold for less than 100% of the asking price for the first time in 17 months in August. And despite the price reductions, demand is still down. National Mortgage Professional
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The 30-year fixed rate hit 6.25% this week. Whoa! CNBC
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Half of US workers say they are “quiet quitting,” meaning they “go slow” as they’d say in the UK. The Hill
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Home price growth is slowing dramatically, but Tampa again had the highest year-over-year home price increase in July at 29.7%. Housing Wire
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Jared Dillian opines that it’s a housing slump, not a crisis. Real estate is local, so we’re not going to see anything like we did in the mid-2000s Great Recession. Exotic loan programs haven’t flooded the market with supply as it did then. Bloomberg
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Who can resist a sloth of huggable bears?
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We hope you found this helpful — any feedback is appreciated and can be shared by hitting reply or using the feedback feature below.
Be on the lookout for our next issue! 👋
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