When home prices fall, home equity drops by an equal amount.

A 10% drop in the price of a home encumbered by a recent maximum loan-to-value (LTV) ratio mortgage will lose 100% of its equity — the result of a process called leverage, the double-edged sword. Had the price gone up 10%, the equity would have, well, doubled increasing 100%.

U.S. homeowners with mortgages — roughly 63% of all properties — had their equity decrease by a total of $108.4 billion since the first quarter (Q1) of 2022, a 0.7% year-over-year loss, according to CoreLogic. In California, prices did not peak until the end of Q2, 2022. Thus, the drop in prices from their peak is greater.

Here in California, the average homeowner lost $60,000 in equity year-over-year, as of Q1 2023. A $1 million home at the peak has become worth ≈ $900,000 in June 2023.

Negative equity — when an owner owes more principal debt on their mortgage than their home’s current resale value — rose nationally during the past year by $34.7 billion, or 11.5% of all residential properties.

In Los Angeles and San Francisco, the share of mortgaged homes with negative equity is 0.9%.

By the end of Q1 2023, the average U.S. homeowner had lost about $5,400 in equity during the past 12 months.

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Underwater homeowners

From the May 2022 home price peak to March 2023, California home prices plunged 7% below their peak in the low-tier price range, and a significant 10% below in the mid- and high-tier price ranges.

With these descents in price, all owners who bought with less than 5% down within the past three years are presently underwater with negative equity. Thus, they will not be able to receive a sufficient price for the resale of their home to pay off the lender, cover transactional costs, and close escrow — without the seller paying the deficiency or the lender agreeing to a discount.

Without an ability to recoup the sales price they paid for the home, these negative equity owners will hold onto their homes, despite any direct or indirect personal and financial costs, becoming prisoners in their own homes.

As home prices continue to recede over the next two-to-three years, watch for the share of underwater homes to rise rapidly, plunging anyone who purchased with a minimal down payment during 2019-2023 deep underwater.

Real estate licensees will get a better handle on how to help these owners by learning to assist underwater homeowners. As agents begin to work with a larger share of homeowners facing negative equity in the recessionary years immediately ahead, agents will gather what options are available for those negative equity homeowners when they incur a household income shock. These shocks — lost or relocated jobs — will gradually become more pronounced each month as we move more fully into the recession, likely to arrive by 2024.

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