This year, for the first time since 2009, the number of California homes that are underwater – where homeowners owe more on their mortgage than the homes are worth – increased. The percentage of mortgaged homes with negative equity is expected to continue to increase for the next couple of years, according to data from Core Logic and reported in First Tuesday Journal.
While the increase was slight, from 2.3 percent in Q3 to 2.4 percent in Q4, the implications for homeowners are significant. In California, home prices began to decline across the state around August 2018, with the rise in negative equity beginning the following quarter.
Home prices across California peaked in the third quarter of 2018 and have continued to decline monthly since then. Despite this, home prices remain 1 percent higher than they were last year, and about 3 percent higher than they were in January 2019. Still, the year-over-year spread has decreased from the 8-10 percent annual increase that was experienced in 2018.
This means a homeowner who purchased a mid-tier home in January 2018, which saw an average increase of about 2% in value for that tier, when factoring in closing costs and sellers’ fees, would have to absorb some losses on the home with each monthly payment.
Broad Impacts when Homes Are Underwater
Homeowners owing more on their homes than what they’re actually worth has both personal and societal impacts. On a persona level, when a homeowner is underwater, their financial options become limited. If they choose to rent out their home so they can relocate for better economic opportunities, such as a new job or a lower cost of living, they’ll often have to rent out the home for less than their monthly mortgage payments. If they choose to sell the home, it will most likely be a short sale that will result in a loss or they’ll have to foreclose if they can’t continue to make their monthly payments.
On a broader level, homes that are underwater effect the local housing market and economy. Homes are sold for less than they’re worth, which lowers comparables for the region. Or, homeowners continue to pay into “black hole assets” instead of investing that money in more secure investments or in their local communities by purchasing goods and services.
It’s expected that homeowners who are currently underwater will not see relief until after the recession that’s predicted to start in 2020. Furthermore, it’s expected that home prices will continue to drop this year and next.
While the percentage of homes that have negative equity is not expected to return to what it was during the housing crash of 2008, experts recommend homeowners be conservative with their finances and that buyers take a conservative approach when investing in real estate.