The record home value increases have already begun to slow, and with projections of a possible 4 percent decline next year, Redfin is looking at the potential impact. According to new estimates, just 3 in 100 pandemic homebuyers would fall underwater should a 4 percent decline become a reality in 2023.
The typical home bought over the last two years will have gained $27,000 in value. According to Redfin, prices would need to fall by double digits in 2023–a highly unlikely scenario–for the typical pandemic home purchase to lose value.
In this instance, a home considered “underwater” if the homeowner were to owe more on their mortgage-loan balance than the home is worth by the end of next year.
Homeowners who bought before 2021 are even less likely to sink underwater with next year’s anticipated price declines.
“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,” said Redfin Senior Economist Sheharyar Bokhari. “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.”
Per the report, some pandemic hotspots are more vulnerable than others, including Sacramento and Phoenix. Just over 9 percent of recent Sacramento homebuyers would be underwater with a 4 percent price drop, the highest share of the metros in this analysis.
Some 6 percent of pandemic buyers in Oakland would be underwater on their mortgage should the 4 percent decline become a reality, while 3.7 percent of San Diego buyers and 2.3 percent of Los Angeles buyers could be underwater by the end of 2023.