Rising mortgage rates threatened to crush Michael and Christine Hawkins’ dream of home ownership. But last fall when the couple saw a Canoga Park condo disappearing on the market, they hatched a plan.
They would submit a “low ball” offer they could live with if they cut back on vacations, shopping and eating out. In a year — when interest prices had hopefully fallen – they could refinance and free up the budget.
Last month, amid a decline in overall home values, the Hawkinses, both in their 30s, closed on the two-bedroom apartment for 7% less than they were asking. But they can be stuck with a hay payment for the foreseeable future, because if house prices continue to fall, they may not have enough equity to refinance.
“There̵[ads1]7;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 very 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 equity drop massively, the result of higher mortgage rates that have sapped purchasing power and sent home values plummeting.
Real estate analysts said the loss in equity – which is expected to deepen – could slow economic growth as people have less to spend on home improvements, paying for emergencies or investing in a business.
The shift in the market is unnerving for some recent buyers who told The Times they fear falling prices will trap them in their mortgages and have personal consequences such as tight budgets and delayed retirement.
Justin Bragg and his wife reached out to buy a home in Boyle Heights late last year. Now, after hearing about several shootings in parks near their home, they wonder if they made a bad choice. Bragg, a high school teacher, feels unsafe taking his 3-year-old daughter to the neighborhood playground. But he worries 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 a drop in home prices can help first-time buyers enter the market, it can limit current owners because in order to sell or refinance, borrowers must pay down their old mortgage, which 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 other fees, even those with some equity left often can’t afford to sell or refinance and can become vulnerable to a credit-damaging foreclosure or short sale, especially if they lose their job or have a medical emergency.
Underscoring the importance of equity in a society where many lack savings and face eye-popping medical bills, a study found that cancer patients with no equity are more likely to refuse treatment and die than patients with positive equity, who tend to withdraw money . of their home and are more likely to accept treatment.
“If you have the asset buffer of a house, that’s something you can use to deal with unexpected events,” said Arpit Gupta, study co-author and finance professor at NYU.
Overall, U.S. homeowners with mortgages have lost $1.5 trillion in equity since equity peaked in May, an 8% reduction, according to September data from mortgage firm Black Knight. The number of underwater mortgages – where someone owes more on the loan than their home is worth – has more than doubled to roughly 450,000 nationwide.
For now, the number of people with little or no home equity is small compared to the aftermath of the Great Recession, although it is increasing.
In 2011, an estimated 30% of foreclosed U.S. homes, or 16 million, were underwater, according to Black Knight data. At the end of September, this percentage was 0.84%, roughly back to where it was at the start of the pandemic.
Those most at risk are people who bought this year.
Black Knight data 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 go underwater in the coming months as home prices continue to slide. But the ranks of people with very little or no equity is unlikely approximation levels seen during the last housing bust.
That’s largely for two reasons, Walden said. Prices weren’t going to fall as much this time and people had more equity to begin with.
Both of these reasons are partly due to tighter lending standards imposed after the 2007-08 financial crisis. And a steady increase in home prices since 2012, along with a 43% increase during the pandemic, also helped homeowners’ balance sheets.
“Borrowers are in a much better position to deal with any upcoming economic fallout and/or fallout from softer home prices,” Walden said in an email.
According to a recent Reuters poll, economists expect a median decline, averaged across major U.S. metropolitan areas, top to bottom, of 12% — about a third of the drop after the housing bubble burst in the early 2000s.
However, estimates within that survey were as high as 30% for today’s decline.
Black Knight recently modeled what a 15% national decline would look like. An estimated 3.7% of the mortgages, or 1.9 million, will then be underwater, which gives these homeowners an increased risk of foreclosure. Overall, the mortgage holders will see $4.5 trillion in equity wiped out.
Boston University economist Adam Guren said falling home prices are causing consumers to cut back, mostly because they have less equity to use and spend through home equity lines of credit and cash-out refinances, but also because some people feel poorer as prices fall.
Guren, who has studied so-called housing wealth, cautioned that a 15% decline is a “pretty big” assumption, but said research suggests it would cause consumers to cut spending by about $193.5 billion to $322.5 billion dollars.
“There are serious economic headwinds,” he said, but it may not be “so bad because it helps the Fed rein in inflation a little bit.”
Some areas may be hit harder. According to Black Knight data, U.S. home prices have so far fallen 3.2% from their 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 home buyers are nonchalant about their home’s declining value, convinced that in the long run prices will rise enough to be a good investment.
Mike Park, 40, bought a $777,500 house in Lakewood in May. He noted all the non-financial benefits he enjoys, including his garage, a garden on a “large lot” and the ability to do with his property as he pleases.
“Even if I pay a little too much, no matter what, I still have my own house,” said the digital marketing specialist.
Park plans to be in his house for at least 10 years. Those with shorter time frames have more at stake.
Jean Madonia said she and her husband Tony decided to take his pension from Coca-Cola as a lump sum and plow most of it into a down payment for a newly built house in Menifee in Riverside County.
Tony took another job at an industrial bakery, and in three to five years the couple, in their early 60s, plan to sell at a profit and move to a cheaper state to comfortably retire.
The decision seemed to make sense at the time. Madonias dropped the payment on the plot last year – a time when house prices were rising.
“We hope in three to five years the market will come back up,” said Jean Madonia. “It’s kind of scary.”