Surging mortgage interest rates threatened to squash Michael and Christine Hawkins' dream of home ownership. But this fall when the couple saw a Canoga Park condo languish on the market, they devised a plan.
They'd submit a "low ball" offer they could stomach if they cut back on vacations, shopping and eating out. In a year — when interest rates hopefully had dropped — they could refinance and free up their budget.
Last month, amid a decline in overall home values, the Hawkinses, both in their 30s, closed on the two-bedroom condo for 7% less than asking. But they may be stuck with a high payment for the foreseeable future, because if home prices keep falling, they might not have enough equity to refinance.
"There is not a lot of wiggle room right now [in our budget]," said Michael Hawkins, 37. "I'm happy we did it, but I'm super nervous what is going to happen."
For the first time in a decade, Southern California homeowners, and those across the country, are seeing their equity fall en-masse, the result of higher mortgage interest rates that have sapped purchasing power and sent home values down.
Real estate analysts said the loss in equity — which is expected to deepen — could curtail economic growth as people have less to spend on home renovations, pay for emergencies or invest in a business.
The shift in the market is unnerving some recent buyers who told The Times they worry falling prices will trap them in their mortgages and have personal consequences such as tight budgets and delayed retirement.
Justin Bragg and his wife stretched to buy a home in Boyle Heights late last year. Now, after hearing of multiple shootings at parks near their home, they wonder if they made a bad choice. Bragg, a high school teacher, feels unsafe just bringing their 3-year-old daughter to their neighborhood playground. But he worries they won't be able to sell or find a renter who'll cover their mortgage.
"Are we stuck in this place?" Bragg, 42, said.
While a drop in home prices can help first-time buyers get into the market, it can limit current owners because to sell or refinance, borrowers must pay off their old mortgage, which most can't do if their equity falls into negative terrain.
Since there's also thousands — often tens of thousands — of dollars to pay in origination and other fees, even those with some equity left can often not afford to sell or refinance and can become vulnerable to a credit damaging foreclosure or short sale, particularly if they lose their job or have a medical emergency.
Underscoring the importance of home equity in a society where many lack savings and face eye-popping medical bills, one study found that cancer patients with no equity are more likely to refuse treatment and die than patients with positive equity, who tend to pull money out of their homes and are more likely to accept treatment.
"If you have the asset buffer of a house, it's something you can use to deal with unexpected events," said Arpit Gupta, study co-author and finance professor at NYU.
Overall, U.S. homeowners with a mortgage have lost a collective $1.5 trillion in equity since equity peaked in May, an 8% reduction, according to September data from mortgage services company Black Knight. The number of underwater mortgages — where someone owes more on their loan than their home is worth — has more than doubled to roughly 450,000 nationwide.
For now, the number of people with little to no equity is tiny compared with the aftermath of the Great Recession, even if it's rising.
In 2011, an estimated 30% of mortgaged U.S. homes, or 16 million, were underwater, according to Black Knight data. At the end of September, that percentage stood at 0.84%, about back to where it was at the start of the pandemic.
Those most at risk are people who purchased this year.
Black Knight data show 8% of U.S. households who bought a home with a mortgage in 2022 are already underwater, while nearly 40% have less than 10% equity.
Andy Walden, vice president of research at Black Knight, said he expects more people will fall underwater in coming months as home price declines continue. But the ranks of people with very little-to-no equity is unlikely to approach levels seen during the last housing bust.
That's in large part for two reasons, Walden said. Prices shouldn't fall as much this time around and people had more equity to begin with.
Both those reasons are in part due to tighter lending standards imposed after the 2007-08 financial crisis. And a steady rise in home prices since 2012, along with a 43% pop during the pandemic, also buoyed homeowner balance sheets.
"Borrowers are in much better positions to weather any upcoming economic impacts and/or fallout from softening home prices," Walden said in an email.
According to a recent Reuters survey, economists expect a median decline, averaged across major U.S. metro areas, from peak to trough, of 12% — about one-third of the drop seen after the early 2000s housing bubble burst.
Estimates within that survey, however, were as high as 30% for today's declines.
Black Knight recently modeled what a 15% national decrease would look like. An estimated 3.7% of mortgages homes, or 1.9 million, would then be underwater, putting those homeowners at heightened risk of foreclosure. Overall, mortgage holders would see $4.5 trillion in equity erased.
Boston University economist Adam Guren said falling home prices cause consumers to cut back, mostly because they have less equity to tap and spend through home equity lines of credit and cash-out refis, but also because as prices decline some people feel poorer.
Guren, who has studied the so-called housing wealth effect, cautioned a 15% decline is a "pretty big" assumption, but said research suggests it would cause consumers to reduce spending by roughly $193.5 billion to $322.5 billion.
"That's serious economic headwinds," he said, but also might not be "so bad because it helps the Fed rein in inflation a bit."
Some areas could be hit harder. According to Black Knight data, U.S. home prices have so far dropped 3.2% from the peak, while prices have fallen 7% across Los Angeles and Orange counties and 6.3% in the Inland Empire.
Not everyone is worried. Some recent home buyers are nonchalant about their home's declining value, convinced that in the long run prices will climb enough to be a good investment.
Mike Park, 40, bought a $777,500 home in Lakewood in May. He noted all the nonfinancial benefits he's enjoying, including his garage, a yard on a "huge lot" and the ability to do with his property as he pleases.
"Even if I am overpaying a little bit, whatever, I still have my own house," the digital marketing specialist said.
Park plans to be in his house for at least 10 years. Those with shorter time frames have more at stake.
Jean Madonia said she and her husband Tony decided to take his pension from Coca-Cola as a lump sum and plow most of it into a down payment for a newly constructed house in Menifee in Riverside County.
Tony took another job at an industrial bakery and, in three to five years, the couple in their early 60s plan to sell at a profit and move to a cheaper state to comfortably retire.
The decision seemed to make sense at the time. The Madonias put the down payment on the lot last year — a time when home prices were soaring.
"We are hoping in three to five years the
