As prices drop, some homeowners in California are nervous

Rising mortgage rates threatened to end Michael and Christine Hawkins’ dream of owning their own home. But this fall, when the couple saw a Canoga Park condo languishing on the market, they hatched a plan.

They would make a “low ball” offer that they could afford if they cut vacations, shopping and dining out. In a year – when hopefully interest rates had fallen – they could refinance and relieve their budget.

Last month, the Hawkinses, both in their 30s, closed the two-bedroom for 7% less than asking amid a decline in overall home values. But they could be left with a hefty payment for the foreseeable future because if home prices continue to fall, they may not have enough equity to refinance themselves.

“There’s not a lot of wiggle room at the moment [in our budget]said Michael Hawkins, 37. “I’m glad we made it through, but I’m super nervous about what’s going to happen.”

For the first time in a decade, homeowners in Southern California and across the country are seeing their equity falling en masse as higher mortgage rates have sapped purchasing power and pushed home values ​​down.

Real estate analysts said the loss of equity – which is expected to deepen – could limit economic growth as people spend less on home renovations, paying for emergencies or investing in a business.

The shift in the market is rattling some recent buyers, who told The Times they fear falling prices will keep them stuck in their mortgages and have personal consequences such as tight budgets and delayed retirement.

Justin Bragg and his wife were looking to buy a home in Boyle Heights late last year. Now, after hearing about multiple shootings in parks near their home, they’re wondering if they made a bad choice. Bragg, a high school teacher, feels unsafe just taking her 3-year-old daughter to the neighborhood playground. But he worries they won’t be able to sell a tenant or find a tenant to cover their mortgage.

“Are we stuck in this place?” Bragg, 42, said.

While a drop in home prices can help first-time buyers get into the market, it can constrain current owners as borrowers have to pay off their old mortgage in order to sell or refinance, which most can’t do when their equity is negative falls.

With thousands — often tens of thousands — of dollars in underwriting and other fees to pay, 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.

A study underscores the importance of home equity in a society where many have no savings and face staggering medical bills. One study found that cancer patients with no equity were more likely to refuse treatment and die than patients with positive equity, who tend to withdraw money from their homes and are more likely to accept treatment.

“When you have the wealth buffer of a home, you can use it to deal with unexpected events,” said Arpit Gupta, study co-author and NYU finance professor.

Overall, US homeowners with a mortgage have lost a combined $1.5 trillion in equity since equity peaked in May, down 8%, according to September data from mortgage services company Black Knight. The number of underwater mortgages — where someone owes more than their home is worth — has more than doubled to around 450,000 nationwide.

Right now the number of people with little to no equity is tiny compared to the aftermath of the Great Recession, even if it’s increasing.

In 2011, an estimated 30% of mortgaged US homes, or 16 million, were under water, according to Black Knight. At the end of September, that percentage was 0.84%, roughly back to where it was at the start of the pandemic.

Those most at risk are those who bought this year.

Black Knight data shows that 8% of U.S. households that bought a home on a mortgage in 2022 are already underwater, while nearly 40% have less than 10% equity.

Andy Walden, Black Knight’s vice president of research, said he expects more people to fall underwater in the coming months as property prices continue to fall. But the ranks of people with very little to no equity are unlikely to get anywhere near the levels of the last housing crisis.

There are two reasons, in large part, Walden said. Prices shouldn’t fall as much this time and people had more equity from the start.

Both reasons are partly due to stricter lending standards imposed after the 2007-08 financial crisis. And a steady rise in house prices since 2012, combined with a 43% drop during the pandemic, has also boosted homeowners’ balance sheets.

“Borrowers are in a much better position to weather the upcoming economic impact and/or fall in home prices,” Walden said in an email.

According to a recent Reuters poll, economists are expecting a median decline, averaged across major U.S. metros, from peak to trough, of 12% — about a third of the fall seen after the housing bubble burst in the early 2000s .

However, estimates in this survey are as high as 30% for today’s declines.

Black Knight recently modeled what a 15% national drop would look like. An estimated 3.7% of mortgage homes, or 1.9 million, would then be under water, putting those homeowners at increased risk of foreclosure. In total, mortgage holders would wipe out $4.5 trillion in equity.

Boston University economist Adam Guren said falling home prices are prompting consumers to save, primarily because they have less equity to tap and spend through home equity lines of credit and payout refis, but also because falling home prices make some people poorer feel.

Guren, who has studied the so-called real estate wealth effect, warned that a 15% drop is a “rather large” assumption, but said research suggests it would cause consumers to increase their spending by about US$193.5 billion -dollars to $322.5 billion.

“It’s serious economic headwinds,” he said, but maybe not “that bad because it helps the Fed curb inflation a bit.”

Some areas could be hit harder. According to data from Black Knight, U.S. home prices are down 3.2% so far from the peak, while prices in Los Angeles and Orange counties are down 7% and Inland Empire down 6.3%.

Not everyone is concerned. Some recent home buyers are indifferent to the declining value of their home and are convinced that prices will rise enough over the long term to be a good investment.

Mike Park, 40, bought a home in Lakewood for $777,500 in May. He mentioned all the non-financial benefits he enjoys, including his garage, a yard on a “huge lot” and being able to do whatever he wants with his property.

“Even if I’m overpaying a bit, whatever, I still have my own house,” said the digital marketing specialist.

Park plans to stay in his home for at least 10 years. For those with shorter timeframes, the stakes are higher.

Jean Madonia said she and her husband Tony decided to take his pension from Coca-Cola as a lump sum and invest most of it in a down payment on a newly constructed home in Menifee, Riverside County.

Tony took another job at a large 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 for a comfortable retirement.

The decision seemed sensible at the time. The Madonias made the down payment on the property last year — at a time when property prices were skyrocketing.

“We hope that the market will pick up again in three to five years,” said Jean Madonia. “It’s a bit scary.”