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Alarming Number of Home Buyers are Underwater as U.S. Home Prices Plunge

Alarming Number of Home Buyers are Underwater as U.S. Home Prices Plunge

California’s housing market is cooling fastest, hitting home equity hard.

The nation’s housing market is beginning to cool. As a result, a new analysis shows that an alarming number of recent home purchasers are now more on their property than it’s worth.

Some 250,000 people who took out a mortgage this year to buy a home are now underwater, meaning they owe more on their loan than the home is worth, Black Knight, a mortgage software provider, found. Another million have less than 10% equity.

Those unlucky homebuyers got caught in the crunch between historically high housing prices and rapidly rising mortgage rates, which in recent months have caused real estate values to slide.

While the portion of underwater mortgages is still historically low, “a clear bifurcation of risk has emerged between mortgaged homes purchased relatively recently versus those bought early in or before the pandemic,” Black Knight said.

California’s housing market is tanking faster than any other state’s.

Housing affordability tanked in California this year. But the state’s stratospherically-high home prices have also led to it witnessing some of the biggest drops in median sale prices since much of the US housing market peaked earlier this year.

Indeed, data provided to Insider from Zillow shows that California has more cities in the list of the top metros with the biggest drop in sale prices than any other state.

According to the stats, San Francisco, San Jose, San Diego, Los Angeles, Sacramento, and Oxnard (which is located near Ventura) have all seen home prices fall more than 5% from their peak values earlier this year. Additionally, Stockton has seen its median sale price drop 4.8% from its peak. That brings California’s total to seven metros out of the top 20 for the nation that have seen the most severe drop in housing prices.

The dramatic drop is impacting home equity, which hits Californians hard.

Homeowners can’t leverage the entire equity in their homes; lender regulations typically require that at least 20% of it be retained. But the remaining “tappable equity” is still significant. It amounts to $11.5 trillion overall, and an average of $216,900 for each American homeowner at the end of June 2022, according to Black Knight.

But the boom appears to be abating, especially in places where equity is the greatest. That includes California, which has a full third of the home equity in the nation. A perennial shortage of homes, combined with the COVID-19-related surge in demand, has driven up home values in California to a greater extent than in most other parts of the country.

Yet Black Knight finds that areas of the country with the highest housing prices, including many parts of California, might be hitting a peak in terms of equity appreciation. California saw a decline of tappable equity of some $155 billion in the second quarter. Granted, that drop comprises a mere 4% of homeowners’ tappable equity in the state. But it’s a shift in the market of which homeowners should be aware, experts say.

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Comments

There’s a definitely lag on sellers acknowledging that the comp between their house that’s for sale NOW is not going to line up with the comp for a similar house that sold when interest rates were half of what they are now.

I see real stagflation here. Sellers are not budging and buyers are 1) fewer, 2) Not willing or not able to buy.

Sucks because we’re trying to buy, but not going to buy at bubble prices. So we watch those houses cook on the market. We did make an offer and it was rejected.

Granted we’re trying to get into NE TN and that market is still hot thanks to Blue State governments.

    goddessoftheclassroom in reply to Andy. | December 14, 2022 at 3:51 pm

    I was blessed to be able to move to Florida from Pennsylvania in July 2021. I offered $5000 over the asking price, and my offer was accepted. The house appraised at $15,000 higher. My mortgage interest rate is 3.2%; I shudder to think of how much more my monthly payment would be at today’s rates.

    Thanks to the high demand resulting from people moving to Jacksonville, my house is now worth $75,000 more than I paid for it. I took out a home equity loan to have a cushion for major repairs such as AC or roof.

    Good luck with your quest. Keep making offers!

      We are at least seeing them not go up. Inventory is still lacking and the nicer houses are still commanding bubble premium in asking price (most are just sitting) For NE TN there isn’t the economy to support these prices so it’s still the allure of cash rich out of state buyers who can remote in to a higher paying gig.

      What no one talks about is those telecommuting roles are great until it goes away. The best “remote” gigs are ones that didn’t start out as remote, but you got it to go remote because you are a rock star and they’ll do what they need to do to keep you. I don’t think that has played out yet for blue state refugees, but it will.

      I don’t think Florida has that problem with the economic opportunity and we were on the fence about choosing Florida, but opted for TN because despite having Elvis for Governor and a state government that isn’t trying to imitate Red China, there’s a lot of crazy going on there and also with the tourism comes a whole lot of crime and predators.

Didn’t learn much from 08.

Buy a home because you want to live in it, not flip it in a couple years.

Despite all the mindless reality shows about flipping houses, normal people should NOT be buying/selling houses in less than a 5 year period.

They can talk about ‘underwater’ all they want, its utterly meaningless unless they actually try to sell it now.

Nobody cares if people that bought a house this year are underwater. So you overpaid – so what? The price will come back up over the next few years.

If they are still underwater 5 years into a mortgage that’s an actual problem.

    Technique in reply to DudeAbides. | December 14, 2022 at 6:40 pm

    The problem with this thinking is that banks start to get really nervous when you are underwater. In a fast moving market like in ’08 you can very quickly have the bank contact you for assurances (read money) that you can cover you payments. When real estate starts to tank then jobs tend to tank with it. This means you have underwater owners without incomes and very very nervous lenders.

    Most people don’t buy within their means and lenders are more than happy to provide loans that make sense when everything is sunny, but when the rain comes …. The problem is going to come when the jobs dry up, and trust me they are going to dry up. The Fed is hell bent on ensuring that oil falls into the toilet to hurt Russia. The problem is to do this they need to tank the U.S. economy to dry up the demand.

    This all isn’t going to end well and unless you have been very defensive monetarily (and even then) you are going to get caught up in what is coming.

      As the post notes this just means they will be more careful in underwriting.

      From what I’ve been seeing on the buying side is the NINJA stuff is in the distant past. Despite having enough in non-retirement accounts to pay cash for the house (don’t want to because of the cap gains hit) AND outright owning our current home, I’m having trouble getting approved for much $ to do a bridge loan because they are outright looking at job history and credit score. I jumped back into the W2 space earlier this to generate cash to help with this move and lenders are treating me like I’m a kid right out of college on my first job. I actually had to go and get a credit card to get a credit score (hadn’t had one in over a decade).

    Wow, DudeAbides, you are dead-on: well done. If someone buys a house to live in, and makes a financially smart decision with the down payment/interest rate/monthly payment, the “value” of the home doesn’t matter. “upside down” is a media buzzword to incite the public. As far as Ms. Eastman’s point of equity goes, if someone chooses to continue borrowing money at every turn so as to always be in debt with no end in sight, they should live the consequences and not complain about their choices.

    meatmann50 in reply to DudeAbides. | December 15, 2022 at 9:34 am

    And never borrow against your home!

I’ve been told that what goes up, will eventually go down.

The truth is that you aren’t underwater, if you don’t try to sell the property.

    Olinser in reply to Neo. | December 14, 2022 at 5:27 pm

    Concur. As the above comment states, being ‘underwater’ less than a year into your mortgage is UTTERLY MEANINGLESS, and honestly probably means that you put in very little down payment more than anything else.

    Buy a home because you want to LIVE IN IT for at least 5+ years, not because it’s an ‘investment’. If you care what it’s theoretical worth is less than a year after buying it, then you shouldn’t have bought it in the first place.

    gonzotx in reply to Neo. | December 14, 2022 at 10:36 pm

    Wrong, people bought when they really couldn’t afford it and idiot banks made the loans, people are losing their jobs and homes in my hot market in Austin area are tanking
    Not as bad as other areas but it’s noticeable

      stevie in reply to gonzotx. | December 15, 2022 at 11:12 am

      If people purchased a home as a HOME and a long-term hedge against inflation, they would be better off than viewing it as an investment they can flip in a few years.

Property prices have been too high for a long time.

    Olinser in reply to geronl. | December 14, 2022 at 5:49 pm

    Eh, too broad a statement. In SOME PLACES (like San Francraphole), they’ve been insanely high for far too long. Rural states and areas they’re actually quite low.

      Technique in reply to Olinser. | December 14, 2022 at 6:45 pm

      Depends on the rural area. Prices in my rural area are wayyyyy higher than they should be.

      The problem is that the COVID moritoriums kept houses out of bankruptcy for too long and when the bank finally gets the house they put the damn thing up for the loan which is very likely inflated.

      It creates the very wierd situation of high levels of inventory tons of new construction and paradoxially high prices.

      Isn’t central planning grand.

      gonzotx in reply to Olinser. | December 14, 2022 at 10:37 pm

      Not in Texas, you can’t buy rural, just try .

    Technique in reply to geronl. | December 14, 2022 at 6:42 pm

    This is where the inflation from money printing ends up.

    Unfortunately for us it isn’t going to stay there.

    MajorWood in reply to geronl. | December 15, 2022 at 3:06 pm

    We need to bring in more illegals to keep the prices up. I always like to point out to the millenials who support open borders that the open border policy insures that their rent in Portland will be $500 more than it should be because of the increased demand. You can put a price on being woke, and around here it is about $15-20 a day.

Progressive prices (e.g. asset inflation), labor arbitrage, environmental arbitrage (e.g. Green deal), [catastrophic] [anthropogenic] climate cooling,,, warming… change, intermittent/unreliable/renewable Green energy blight, redistributive change schemes, coups without borders (e.g. World War Spring). etc.

so far, this is making a bit of a mountain out of a molehill. Which would you rather have, a $400,000 house with a 3% mortgage for 30 years, or a $360,000 house with a 6% mortgage for 30 years. The lower rate will cover the $40,000 excess paid in less than 5 years and be ahead thereafter.

    stevie in reply to jb4. | December 15, 2022 at 11:14 am

    It’s best to pay extra principle each month once you can afford it, and pay off the mortgage early. And definitely do it before you retire. Debt limits your choices in life.

Prices in North west Fort Worth have been insane, too many Californians moving in. From December of 2020 to March 2021, my home price went up 70K, Since the,n last summer, an identical floor plan and lower optioned house, 3 doors down the road, sold for 190K more than I paid for mine in 2020

We bought our first house in 1991 for much less than what the mortgage companies would have approved us for, since we were worried about job stability. It was a small house in the middle of a city. Our “plan” was to live there for 5 or 6 years and then move up into a larger house. We ended up living there for 27 years (so much for the “plan”) while constantly maintaining and upgrading the place from basement to roof.

We paid off a 30-year mortgage in 11 years. We put the money we’d been making for mortgage payments into savings/investment, and my wife retired at 50, and we lived on one income for the next ten years.

We bought our current house with cash (paying capital gains on some investments rather than going into debt again with a bridge loan), not needing to sell our old house until we had moved into the new one. We sold the old house months later at a bargain price (since we wanted to get it done quickly) and put that money back into savings/investment. We’re now living on SocSec (we’ll only get about half of what we were forced to put into it back) and our retirement monies.

The biggest problem I see are people buying houses that are far beyond their means, driven by societal pressure to live in a McMansion when a smaller, older home would do just fine. When one of them (or both) lose their jobs, they are then “underwater”, a problem (as many have noted) that it only matters when they sell.

The whole idea of avoiding debt like the plague is very old-fashioned, but the concept of living well below your means pays dividends in the long run.

We made an offer on a house this past June that was a little over the list price. Our realtor suggested the list price was already $25K over the comp value. We lost to people who offered $50K OVER the inflated list.

I hope they bought a life raft because they are certainly underwater.

Our realtor said the new owners wouldn’t see equity for 20 years.

What’s new? I bought a new house in the early 80’s, and literally was underwater before the loan closed.