BAM’s Key Details:
- Only 3 in 100 homeowners would go underwater on their mortgage in prices decline by 4%, according to a Redfin report
- While a foreclosure crisis is unlikely, middle-class homeowners will feel the effects of home price declines the most
The majority of housing economists predict housing prices will either remain flat or see a slight drop in 2023. But with headlines about 2008 continuing to circulate, many consumers fear a foreclosure crisis.
That’s not the case, according to a new Redfin report. If home prices decline over the next twelve months, only a small percentage of homeowners would go underwater on their mortgage, making a foreclosure crisis highly unlikely.
Here’s a breakdown of the report.
Homeowners are Unlikely to Go Underwater on their Mortgage
Homeowners who purchased their home between January 2021 and September 2022 beat the buying frenzy—and most paid over asking price to do so. But that doesn’t mean a price dip would hurt their mortgage standing.
In fact, if prices decline by -4%, as Redfin economists predict, only 3.4% of homeowners would be underwater on their mortgage. If home prices drop by -8%, the share of homeowners who would be underwater increases to 6.6%, and up to 10.5% if prices were to see a sudden downswing by -12%.
Increased Equity and Tight Lending Standards Protect Recent Homeowners
There are two reasons homeowners who bought between January 2021 and September 2022 are unlikely to face issues with their mortgage:
- Most have already earned plenty of equity because home prices have increased rapidly over the past two years.
- Homeowners had to meet tight lending standards, unlike the years leading up to the Great Recession.
Add in the fact that they likely have low fixed mortgage payments, and homeowners are in an excellent position to ride out whatever the housing market brings next year.
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. 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.
Middle-Class Homeowners May Get Hit the Hardest
Even though a foreclosure crisis isn’t likely to happen, middle-class homeowners may feel the effects of price drops the most. Most have a significant share of their assets in real estate, so if the value of their property declines, their wealth takes a hit.
Remember that the loss only happens if homeowners need to sell during the price decline. Those who hold on to their properties through any decline will eventually build more wealth when the economy recovers.