Home values are likely to fall next year, and some recent buyers may find themselves in the predicament of being underwater on their mortgages. But experts say most homeowners probably don’t need to worry too much.
A new analysis from real estate brokerage Redfin finds that if home values fall by its forecasted rate of 4% by the end of 2023, just 3.4% of homeowners who bought between January 2021 and September 2022 will owe more on their mortgage than the home is worth — aka be underwater.
Even if that 4% decline happens, the typical home purchased over the last two years will actually have gained $27,000 in value. Redfin also found that home prices would need to fall by 10% or more in 2023 for the typical home purchased over the past two years to lose value — a scenario it describes as “highly unlikely.”
After years of strong growth, home prices have been declining slightly in recent months. Experts are divided on whether prices will continue to fall next year. While Redfin expects a 4% price decline, Realtor.com Chief Economist Danielle Hale is forecasting that prices will rise at a pace of 5.4% in 2023. The experts at Zillow, on the other hand, say that prices will barely budge. They're expecting a bump of 1.2%.
What does it mean when a home is “underwater”?
A home that’s described as “underwater” isn’t literally underwater. The term underwater, along with the phrase “upside down,” refers to a situation when the outstanding balance on a mortgage loan is higher than the value of the property. In other words, a home is underwater when the owner owes more on the mortgage than the home is actually worth.
If you end up underwater on your mortgage and need to sell your home, you’ll be forced to take a loss — something that was all-too-common during the 2008 financial crisis and housing collapse. In a worst-case scenario, foreclosure is a possibility.
Fortunately, Redfin Senior Economist Sheharyar Bokhari says homeowners don’t have to worry about a crisis on the scale of 2008 anytime soon.
“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,” he said in a statement.
Recent buyers face more risk of underwater homes
The risks posed by falling home values are greatest for people who bought houses within the past year or so. Recent data from mortgage technology and data provider Black Knight shows that 8% of homeowners who bought in 2022 are now underwater.
Mortgage rates are now roughly twice as high as their recent low. “Risk among earlier purchases is essentially nonexistent given the large equity cushions these mortgage holders are sitting on,” Black Knight Data & Analytics President Ben Graboske said in a news release.