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18 WILL PROJECTED PRICE DECLINES DRIVE PANDEMIC HOMEBUYERS UNDERWATER? According to a new report from Redfin, recent homebuyers in certain cities, such as Sacramento and Phoenix, are at higher risk of falling underwater on their mortgages, while Florida homeowners are at even lower risk. New data found just 3.4% of U.S. home- owners who bought in the last two years would be underwater on their mortgage if home values were to fall 4% by the end of 2023. e typical home bought over the last two years will have gained $27,000 in value, even with prices falling 4% next year as Redfin economists predict. Prices would need to fall by double digits in 2023—a highly unlikely scenario—for the typical pandemic home purchase to lose value. If home prices fall 8% in 2023—more than the expected drop—still just 6.3% of new homeowners would be underwater. Prices would need to fall about 12% for the share of underwater homeowners to reach double digits. is is according to a Redfin analysis of county sale records for homes purchased from January 2021 through September 2022. For the analysis, we projected home values declin- ing 4% from November 2022 to December 2023, with a home considered "underwater" if we expect the homeowner to owe more on their mortgage-loan balance than the home is worth by the end of next year. We also consid- ered a few other price-decline scenarios. Homeowners who bought from January 2021 through September 2022 are likely to have low fixed mortgage payments and good enough credit to meet tight lending standards. And even though they haven't owned their home for long, those new homeowners are likely to have already earned plentiful equity because prices skyrocketed so much during the pandemic and because they were likely to have made big down payments. at's especially true for those who bought in 2021 when mortgage rates sat at record-low 3% levels all year and home prices had yet to peak. Someone who bought a $400,000 home with a 3% rate would have a monthly payment of just under $2,000; for the sake of comparison, the monthly pay- ment would be $2,500 with a 6% rate. Consider a homeowner who purchased their home in January 2021 for the then-me- dian U.S. sale price of $329,000. Because of the pandemic homebuying frenzy, their home value has already increased by about 20% to just under $400,000. Prices falling about 4% to $380,000 by the end of next year still leaves them with about $50,000 in home- price appreciation without accounting for the mortgage payments they have made in the last two years. Homeowners who bought before 2021 are even less likely to sink underwater with next year's anticipated price declines, partly because they have built up more equity and partly because many of them refinanced when rates were at an all-time low. A foreclosure crisis is unlikely, but mid- dle-class homeowners may lose a substantial chunk of wealth with declining home values. "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," Redfin Senior Economist Sheharyar Bokhari said. "Recent homebuyers have enough equi- ty—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—hav- ing 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." Even though a foreclosure crisis is highly unlikely, middle-class homeowners do stand to lose a substantial chunk of their wealth if home values fall, as a big share of their assets tends to be in real estate. e typical American earning the median income holds about 38% of their wealth in real estate, versus about 27% to 30% for higher earners. e share of wealth held in real estate has also increased more during the pandemic for middle-class homeowners than higher earners, rising about four percentage points for middle-class households and two to three percentage points for higher earners. However, the loss would be temporary and only on paper for homeowners who don't sell soon, as home values are likely to increase once rates come down and the economy recovers. Homeowners in popular pandemic des- tinations and expensive West Coast cities are at higher risk of falling underwater. Some parts of the United States, including pandemic boomtowns and tech hot spots, are at higher risk of homeowners falling under- water. Just over 9% of recent Sacramento homebuyers would be underwater with a 4% price drop, the highest share of the metros in this analysis. "Home prices have dropped quickly and substantially after skyrocketing during the pandemic. It has been a shock to the system for homeowners and sellers, though they're getting used to the new reality," Sacramento Redfin agent Alison Williams said. "In a way, a correction like this was inevitable; prices can't keep going up by double digits forever. And the silver lining is that people who have been hoping to buy their first home but were priced out may be able to enter the market when prices—and hopefully rates—come down next year." e typical Sacramento home bought in the last two years would lose roughly $17,000 in value with a 4% price decline next year, one of just five metros in this analysis where homes would lose value at that size drop. e others are all tech towns, mostly in the Bay Area: San Francisco, San Jose, Oakland, and Seattle. In terms of risk of falling underwater, after Sacramento comes Phoenix, where 7.3% of recent buyers would fall underwater with a 4% price decline. Next, come Virginia Beach (7.3%), Oakland (6.6%), and Seattle (6.4%). Phoenix homeowners are at relatively high risk of falling underwater for similar reasons as those in Sacramento. ey're both among the Journal