Just 3% of recent buyers will be underwater if prices drop 4%

Slightly more than 3% of people who bought a home since the start of 2021 will be underwater if prices drop 4% by the end of 2023, a Redfin study claims.

The results on the headline level diverge from a similar analysis from Black Knight, which found one-in-12 mortgages originated this year were already underwater, and that this year’s vintage makes up 60% of properties for which the owner owes more than it’s worth.

Purchases made in 2021 moderate the overall results in the Redfin study. And because it includes county home sales records from between January 2021 and September 2022, all-cash transactions are part of the dataset.

The share of all cash sales hit an eight-year high in the second quarter at 35.4%, Attom Data Solutions previously reported.

For the purposes of the Redfin study, a home is at risk of falling underwater if the owner will owe more than it is projected to be worth in December 2023.

“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,” said Redfin Senior Economist Sheharyar Bokhari in a press release. “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.”

If prices remain unchanged, 1.6% of homeowners would be underwater. At a 4% drop, it’s 3.4%, while at 8% the share is 6.3%. A 12% decline in values would put 10.3% of Americans owing more than their home is worth.

“Black Knight’s analysis of home values against loan level data shows that what equity risk does exist in the market is still small and isolated almost entirely to mortgage holders who purchased at or near the top of the market and in 2022 more generally,” said Andy Walden, its vice president of enterprise research and technology, in an emailed response.

Black Knight found that 3% of homes mortgaged in 2021 have less than 10% equity, which was a byproduct of the historic home price growth over the year.

“The greatest equity challenges face those mortgage holders who purchased their homes between May and July of this year,” Walden said. “Nearly 10% of these folks are already at least marginally underwater and more than 30% have less than 10% equity.”

But whether home price growth will in fact be negative by the end of next year is still an open question. While annual price depreciation is expected by next spring, values are expected to grow 4.1% on a year-over-year basis by October 2023, CoreLogic predicted.

However, some areas will fare worse than most of the nation, the Redfin analysis found. Sacramento, California will fare the worst with a 4% price drop, which would leave 9% of homeowners underwater.

The typical Sacramento home bought in the last two years would lose roughly $17,000 in value with a 4% price decline next year. The other metros that would lose value at that size of a drop are all tech towns, the Bay Area trio of San Francisco, San Jose and Oakland, along with Seattle.

On a percentage basis, after Sacramento is Phoenix, 7.3%; Virginia Beach, Virginia, 7.3%; Oakland, 6.6%; and Seattle 6.4%.

Virginia Beach situation is unique because many area borrowers obtain 0% down Veterans Affairs mortgages and thus are purchasing a house holding no equity.

On the other hand, the South Florida cities of Miami, Fort Lauderdale and West Palm Beach would have between 0.2% and 0.3% of local homeowners underwater if prices dropped 4%.

“Recent homebuyers in parts of Florida are sitting pretty because home prices there have risen even more dramatically than they have in the rest of the country and they haven’t come close to falling,” Bokhari said. “Values in Florida are resilient because there’s still a fair amount of demand from remote workers and retirees who are relocating from more expensive areas.”