With Black Knight’s July data showing the largest single-month dip in U.S. home-price growth since 2011, the company reported that tappable equity — the amount a homeowner can borrow against while maintaining a 20% equity stake — appears to have peaked.
The second quarter marked the 10th straight record-high period for tappable equity, with homeowners carrying a collective $11.5 trillion, up $500 billion from Q1 2022. But signs are already pointing to what Black Knight termed “a sizable reduction” that is coming in the third quarter.
“While mortgage holders’ tappable equity had grown 25% from last year to hit yet another record high in Q2, we noted that equity actually peaked in May and tracked the pullback that began in June before escalating in July,” said Ben Graboske, the company’s president of data and analytics. “Tappable equity is now down 5% in the last two months, setting up Q3 to likely see the first quarterly decline in tappable equity since 2019.”
Sure enough, there have already been substantial contractions in tappable equity in some of the most equity-rich markets in the country, particularly on the West Coast. San Jose, for example, shed 20% of its tappable equity from April through July. Homeowners in Seattle (which lost 18% of its tappable equity over the same three months), San Diego (-14%), San Francisco (-14%) and Los Angeles (-10%) have likewise seen double-digit percentage points slashed from their tappable equity since April.
While July marks the first month of price declines in almost three years, Black Knight noted that the impact of price declines is magnified twofold when it comes to tappable equity. That is, a 5% decrease in nationwide home values would lead to a 10% drop in tappable equity drop, and so on.
“Keep in mind that of the roughly 275,000 borrowers who would fall underwater from a 5% price decline, more than 80% purchased their homes in the first six months of 2022 – right at what appears to have been the top of the market,” Graboske noted. “With prices continuing to correct and … home equity lending at its highest level in 12 years, we will keep a very close eye on equity positions in the coming months.”