Soaring mortgage interest rates threatened to crush Michael and Christine Hawkins’ dream of home ownership. But this fall, when the couple saw a Canoga Park condo languishing on the market, they hatched a plan.
They would submit a “low ball” offer that they could accept if they reduced their vacations, shopping and dining out. In one year — when the interest rates had hopefully come down – they could refinance and free up their budget.
Last month, amid a decline in overall home values, the Hawkins, both in their 30s, closed the two-bedroom condo for 7% less than requested. But they can be stuck with a high payment for the foreseeable future, because if house prices continue to fall, they may not have sufficient equity to refinance.
“There’s not a lot of wiggle room right now. [in our budget]”, said Michael Hawkins, 37. “I’m glad we did it, but I’m super nervous about what’s going to happen.
For the first time in a decade, homeowners in Southern California and those across the country are seeing their net worth plummet en masse, as rising mortgage interest rates have sapped purchasing power and made lower home values.
Property analysts said the loss of equity – which is expected to worsen – could dampen economic growth as people have less to spend on home renovations, pay for emergencies or invest in a business.
The market move is confusing some recent buyers who told The Times they fear lower prices will trap them in their mortgages and have personal consequences such as tight budgets and delayed retirement.
Justin Bragg and his wife stretched out to buy a house in Boyle Heights late last year. Now, after hearing about several shootings in parks near their homes, they wonder if they made the wrong choice. Bragg, a high school teacher, doesn’t feel safe just bringing his 3-year-old daughter to his neighborhood playground. But he fears they won’t be able to sell or find a tenant who will cover their mortgage.
“Are we stuck in this place? Bragg, 42, said.
While lower home prices can help first-time buyers enter the market, it can limit current homeowners because to sell or refinance, borrowers must pay off their old mortgage, what most cannot do if their equity falls into negative territory.
Since there are also thousands – often tens of thousands – of dollars to pay in origination fees and the like, even those who still have some equity left often cannot afford to sell or refinance and may become vulnerable to credit-damaging seizure or short sale, especially if they lose their job or have a medical emergency.
Highlighting the importance of home equity in a society where many lack savings and face exorbitant medical bills, a study found that cancer patients without equity are more likely to refuse treatment and die than patients with a positive net worth, who tend to withdraw money. from home and are more likely to accept treatment.
“If you have a house’s buffer of assets, that’s something you can use to deal with unexpected events,” said study co-author and NYU finance professor Arpit Gupta. .
Overall, U.S. homeowners with mortgages have lost $1.5 trillion in equity since peaking in May, an 8% reduction, according to September data from mortgage services firm Black Knight. The number of underwater mortgages – where someone owes more on their loan than their home is worth – has more than doubled to around 450,000 nationwide.
For now, the number of people with little or no equity is tiny compared to the consequences of the Great Recession, even if it is increasing.
In 2011, about 30% of US mortgaged homes, or 16 million, were underwater, according to data from Black Knight. At the end of September, this percentage stood at 0.84%, roughly where it was at the start of the pandemic.
Those most at risk are people who bought this year.
Data from Black Knight shows that 8% of US households that bought a home with a mortgage in 2022 are already underwater, while nearly 40% have less than 10% equity.
Andy Walden, vice president of research at Black Knight, said he expects more people to fall underwater in the coming months as home prices continue to fall. But the ranks of people with very little or no equity are unlikely to approach the levels observed during the last real estate crisis.
This is largely for two reasons, Walden said. Prices shouldn’t drop as much this time around and people had more equity to start with.
Both of these reasons are partly due to the stricter lending standards imposed after the 2007-08 financial crisis. And a steady rise in house prices since 2012, as well as a 43% rise during the pandemic, have also supported homeowners’ balance sheets.
“Borrowers are in a much better position to deal with future economic impacts and/or fallout from lower house prices,” Walden said in an email.
According to a recent Reuters survey, economists expect a median decline, on average across major U.S. metropolitan areas, from peak to trough, of 12% — about a third of the drop seen after the outbreak broke out. the real estate bubble of the early 2000s.
Estimates from that survey, however, were as high as 30% for today’s declines.
Black Knight recently modeled what a 15% national decrease would look like. An estimated 3.7% of mortgage homes, or 1.9 million, would then be underwater, putting those homeowners at increased risk of foreclosure. Overall, mortgage holders would see $4.5 trillion in equity wiped out.
Boston University economist Adam Guren said falling home prices are causing consumers to cut back on spending, primarily because they have less equity to leverage and spend through home equity lines of credit and cash rebates, but also because as prices fall, some people feel poorer.
Guren, who has studied the so-called housing wealth effect, warned that a 15% drop is a “pretty large” assumption, but said research suggests it will cause consumers to cut spending by around $193.5 billion to $322.5 billion.
“These are serious economic headwinds,” he said, but it may not be “that bad because it helps the Fed get inflation under control a bit.”
Some areas might be harder hit. According to data from Black Knight, home prices in the United States have so far fallen 3.2% from the peak, while prices have fallen 7% in Los Angeles and Orange counties. . and 6.3% in the Inland Empire.
Not everyone is worried. Some recent buyers are nonchalant about the fall in value of their home, convinced that in the long term, prices will rise enough to be a good investment.
Mike Park, 40, bought a $777,500 home in Lakewood in May. He noted all the non-financial benefits he enjoys, including his garage, a yard on a “huge lot” and the ability to do with his property as he pleases.
“Even if I pay a little too much, it doesn’t matter, I still have my own house,” said the digital marketer.
Park plans to be in his house for at least 10 years. Those with shorter deadlines have more at stake.
Jean Madonia said she and her husband Tony decided to take her Coca-Cola pension as a lump sum and spend most of it on a down payment for a newly built house in Menifee, Riverside County .
Tony has taken another job at an industrial bakery, and in three to five years the couple in their early 60s plan to sell for a profit and move to a cheaper state to retire comfortably.
The decision seemed sensible at the time. The Madonias made the down payment on the land last year, at a time when house prices were skyrocketing.
“We hope that in three to five years, the market will pick up again,” said Jean Madonia. “It’s a little scary.”
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