Study Predicts Few Underwater Buyers if Home Values Fall

Only a small share of the thousands of pandemic-era homebuyers would be underwater on their mortgages if home values fall in 2023, a new study estimates. 

Economists at brokerage and listings portal Redfin estimated that only 3.4 percent of homes bought in the last two years would be underwater on their loans if home values fell 4 percent over the course of next year. If values fall 8 percent, only 6.3 percent will be underwater. And for the share of underwater pandemic homebuyers to hit breach 10 percent, home values would have to fall by 12 percent. 

By comparison, the Case-Shiller Home Price Index fell 19.85 percent over the course of the Great Recession from February 2007 to April 2009. 

It’s partly a testament to how much home values rose over the course of the pandemic, the researchers noted, and could calm fears of a foreclosure crisis caused by an economic downturn in 2023 driven by a Federal Reserve bent on taming inflation at the expense of all other priorities. 

“Even with anticipated price declines, next year’s housing downturn won’t come anywhere close to the foreclosure crisis we saw during the Great Recession in most parts of the country,” Redfin Senior Economist Sheharyar Bokhari said in a statement. “Recent homebuyers have enough equity–both because they’re likely to have made relatively large down payments with a low rate and because values rose so much so fast–that most aren’t at risk of owing more than their house is worth. Even if a homeowner is at risk of falling behind on their mortgage payments next year–say they lose their job and inflation has claimed a big chunk of their savings–having equity means they could sell instead of face foreclosure. It’s also worth noting that not many Americans are expected to lose jobs next year, as even if the U.S. does enter a recession it’s expected to be mild.” 

Some analysts have pointed to the number of homes bought during the pandemic as a potential cause for concern should a severe job-loss recession develop next year. Buyers near the start of their mortgage terms typically have little equity built up in their homes and pandemic-era buyers made their purchases as the housing market was rocketing upwards, potentially past a sustainable level for home values. 

But, Redfin researchers noted, many of these pandemic buyers’ monthly mortgage payments are still relatively low thanks to the ultra-low mortgage interest rates that dominated the market until this summer. 

While the researchers discounted the possibility of a foreclosure crisis like that ignited by the Great Recession, they noted that a serious drop in home values would eliminate a “substantial chunk” of the American middle class’ wealth. The median-income American holds about 38 percent of their wealth in real estate compared to between 27 percent and 30 percent for high-earners. 

The markets at greatest risk of foreclosure problems are markets that ran especially hot during the pandemic and West Coast cities whose tech-dominated economies are slumping. In Sacramento, for example, 9 percent of pandemic homebuyers would be underwater with a 4 percent price drop and 14.4 percent with an 8 percent price drop, the researchers said, the highest share of all metro areas in Redfin’s analysis. In Phoenix, a top pandemic boomtown, 7.3 percent of these buyers would be underwater with a 4 percent price drop and 10.4 percent with an 8 percent price drop.