Nearly half of US states are becoming a negative equity hotspot, with as many as one in 20 homeowners going 'underwater' on their mortgages, a new study suggests.
Overall, U.S. households saw their net worth increase by $1.1 trillion in the third quarter of 2023 compared to the same period in 2022, reversing a trend seen at the start of the year. The number of homes with a negative equity also fell by 7.7 percent, according to a report from the real estate insights agency KernLogic.
However, a troubling pattern is emerging as 23 states have “high” or “very high” rates of homeowners facing this problem, while Louisiana is among the hardest hit.
Negative equity occurs when an individual's outstanding mortgage balance exceeds the value of their home.
In a strong market, properties should increase in value over time, meaning borrowers have little risk of falling into negative equity.
However, a troubling pattern is emerging as 23 states have “high” or “very high” rates of homeowners facing this problem, while Louisiana is among the hardest hit.
However, when prices start to fall and interest rates rise, those with small down payments are most at risk of going underwater.
Falling into negative equity can make it difficult to sell or refinance a home, leaving many trapped in their property. The issue turned into a crisis during the 2008 financial crisis, when house prices plummeted overnight.
According to CoreLogic's analysis, there are three states with a “very high” share of homeowners at risk of flooding.
Louisiana came out on top, as 6.1 percent of residents with a mortgage have negative equity. It was followed by Oklahoma and Iowa, where 4.1 percent and 4.9 percent of citizens face the problem, respectively.
Another 20 states were found to have “high” negative equity, meaning more than 2 percent of residents were affected.
Among them are: New Mexico, Alabama, Pennsylvania, New York and Maine.
Nevertheless, the report largely paints a positive picture of U.S. housing gains.
Between July and September, the average homeowner gained more than $20,000 in equity compared to the same period last year.
Homeowners in Hawaii, California and Massachusetts saw the biggest gains, with their property values increasing by an average of $45,000 or more.
The recovery was attributed to the surprising resilience of the US real estate market after mortgage rates rose towards 8 percent
A new report from real estate portal Realtor.com predicts that both prices and mortgages will fall next year – albeit modestly
It's a stark contrast to the first quarter of the year, when the average homeowner saw their home equity plummet by $5,400 compared to the same period the year before.
The recovery was attributed to the surprising resilience of the US real estate market after mortgage rates rose towards 8 percent. They now hover at 6.67 percent, according to data from a government-backed lender Freddie Mac.
High interest rates were expected to chill red-hot prices, as most buyers secured 30-year mortgages when interest rates were at record lows. Moving away from home would mean adding an average of about $1,000 to monthly mortgage payments.
However, a lack of available housing stock has kept prices abnormally high. Data from real estate portal Redfin shows that the average American home sold for $408,732 in November, up 3.7 percent from the same period last year.
Dr. Selma Hepp, chief economist at CoreLogic, said: 'As price increases continue to help homeowners build wealth, home equity has reached new highs and regained losses from last year's declines.
“And while the average American homeowner has gained more than $20,000 in additional equity compared to the third quarter of 2022, some markets are seeing larger increases as price growth catches up.”