Rising mortgage rates threatened to derail Michael and Christine Hawkins’ dream of home ownership. But this fall, when the couple saw their Canoga Park condo on the market in disrepair, they hatched a plan.
If they cut out vacations, shopping, and eating out, they would be giving their stomachs a “lowball” offer. Within a year – when interest rates will hopefully drop – they can refinance and free up their budgets.
Last month, amid declining overall home values, the Hawkinses, both in their 30s, closed on their two-bedroom condo for 7% less than asking. But they may be stuck with a high payment for the foreseeable future because they may not have enough equity to refinance if home prices continue to fall.
“There’s not a lot of wiggle room right now [in our budget],” said Michael Hawkins, 37. “I’m happy we did it, but I’m really worried about what’s going to happen.”
For the first time in a decade, Southern California homeowners and those across the country are seeing a massive drain on their equity as a result of high mortgage interest rates that are eroding purchasing power and driving down home values.
Real estate analysts said the capital loss, which is expected to deepen, could dampen economic growth as people have less to spend on home repairs, pay for emergencies or invest in businesses.
The shift in the market worries some end-buyers, who told The Times they worry falling rates will trap them in their mortgages and lead to 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 of multiple shootings in parks near their home, they wonder if they made the wrong choice. Bragg, a middle school teacher, feels safe when she brings her 3-year-old daughter to the neighborhood playground. But she worries they won’t be able to sell or find a tenant to pay the mortgage.
“Are we stuck in this place?” Bragg, 42, said.
While falling home prices can help first-time buyers enter the market, it can limit current owners because borrowers must pay off their old mortgages to sell or refinance, something most can’t do if their equity falls into negative territory.
With thousands of dollars, often tens of thousands of dollars, in origination and other fees, even those with some equity often don’t have the ability to sell or refinance and can be vulnerable to a credit-damaging foreclosure or short sale, especially if they lose their job. or provide emergency medical care.
Underscoring the importance of home equity in a society where many don’t save and face eye-watering medical bills, a study found that cancer patients with no equity were more likely to decline treatment and die than patients with positive equity who tended to withdraw. live in their homes and are more likely to receive treatment.
“If the house has an asset buffer, that’s something you can use to deal with unexpected events,” said study co-author Arpit Gupta, professor of finance at NYU.
In total, U.S. homeowners with mortgages have lost $1.5 trillion in equity, down 8% since peaking in May, according to September data from mortgage servicer Black Knight. The number of underwater mortgages — where someone owes more on the loan than their home is worth — has reached nearly 450,000 nationwide.
For now, the number of people with little or no equity, if even increasing, is small compared to the aftermath of the Great Recession.
In 2011, approximately 30% of foreclosed homes in the United States, or 16 million, were flooded. At the end of September, this percentage returned to where it was at the beginning of the pandemic and made 0.84%.
Most at risk are people buying this year.
Black Knight data shows that in 2022, 8% of US households buying a home with a mortgage are already underwater, and nearly 40% have less than 10% equity.
Andy Walden, vice president of research at Black Knight, said he expects more people to be flooded in the coming months as home prices continue to fall. But it’s unlikely that the ranks of people with little or no equity will approach the levels seen during the recent housing crisis.
That’s in large part for two reasons, Walden said. Prices shouldn’t have fallen too much this time, and people had more capital to start with.
Both reasons are due in part to tighter credit standards imposed after the 2007-08 financial crisis. The steady rise in home prices since 2012, along with a 43% increase during the pandemic, has also strengthened homeowners’ balance sheets.
“Borrowers are better positioned against any upcoming economic impacts and/or the consequences of softening home prices,” Walden said.
According to a recent Reuters poll, economists expect an average decline of 12% from the peak in major U.S. metro areas — about a third of the decline seen since the housing bubble burst in the early 2000s.
However, estimates in this survey were as high as 30% for today’s declines.
The Dark Knight recently modeled what a 15% national reduction would look like. About 3.7% of mortgaged homes, or 1.9 million, will be flooded, putting homeowners at greater risk of foreclosure. In total, mortgage holders will see $4.5 trillion in equity wiped out.
Adam Guren, an economist at Boston University, says that falling home prices cause consumers to cut back because they have less capital to spend and spend through home equity lines of credit and cash, but also because some people feel poorer as prices fall.
Guren, who studied the so-called housing wealth effect, cautioned that the 15% reduction was a “pretty big” assumption, but said the study would reduce consumer spending by about $193.5 billion to $322.5 billion.
“These are serious economic headwinds,” he said, but “may not be so bad because it helps the Fed rein in inflation a little bit.”
Some areas may be hit harder. U.S. home prices are down 3.2% year-to-date from their peak, while Los Angeles and Orange counties are down 7% and the Inland Empire is down 6.3%, according to Black Knight data.
Not everyone is worried. Some recent homebuyers ignore the decline in their home’s value, confident that in the long run prices will rise enough to be a good investment.
Mike Park, 40, bought a home in Lakewood in May for $777,500. He mentioned all the non-financial advantages he received, including a garage, a yard on “great land” and the ability to do as he pleased with his property.
“Even if I pay a little more, I have my own home no matter what,” said the digital marketing specialist.
Park plans to stay in her home for at least 10 years. Those with shorter tenures are at greater risk.
Jean Madonia said she and her husband, Tony, decided to take their pension from Coca-Cola in a lump sum and put most of it toward a down payment on a new home in Menifee, Riverside County.
Tony started another job at an industrial bakery, and in 3-5 years the couple, who are in their early 60s, plan to sell at a profit and move to a cheaper state for a comfortable retirement.
The decision seemed logical at the time. The Madonias put the down payment on the lot last year – at a time when home prices were soaring.
“We hope that in three to five years the market will rise again,” said Jean Madonia. “It’s a little scary.”
This story originally appeared in the Los Angeles Times.