Rising Home Foreclosures Amid Negative Equity Concerns

As owners worry about a “negative equity timebomb,” home foreclosures are rising for a second year.

ATTOM reports 186,000 foreclosures in the first half of the year. An unstable property market and rising mortgage rates fuel the pattern. Some property landscapes in America are considerably worse than others.

Atlantic City, New Jersey saw the largest increase in foreclosures, with 6.8 properties per 10,000 facing repossession, per Attom. Florence, South Carolina, New Haven, Connecticut, and Baltimore, Maryland followed.

Atlantic City’s levels were likely a leftover from the global epidemic when its local economy was boosted by hefty stimulus measures, according to Villanova University economics professor David Fiorenza.

He cited the $1.9 trillion American Rescue Plan Act of 2021. Atlantic City relies on its gaming and entertainment sectors, which were shut down during the pandemic.

Experts agreed that foreclosure rates were “catching up,” following a lockout to protect homeowners.

Many locations with higher possessions have higher property taxes, which strains owners. Inflation, which reached 9.1 percent last year, but has since dropped to three percent, is straining households.

The Fed has steadily raised interest rates to curb consumer spending to manage the crisis. Mortgage rates have soared from roughly two percent in 2021 to just under seven percent.

It implies a $400,000 homebuyer will spend $1,000 more monthly than two years ago. This week, the Fed raised interest rates to their highest level since 2001, potentially raising mortgage rates.

Many homeowners feel ‘trapped into’ their homes after buying them when rates were low, which has slowed buyer activity. The property market is in upheaval, threatening to reverse pandemic-driven house price rises.

For the first time in 11 years, the S&P Core-Logic Case-Shiller National Home Price Index showed home values falling last month. It has raised concerns about homeowners’ risk of negative equity, which occurs when their mortgage balance exceeds their property’s worth.

In a healthy market, properties should appreciate, reducing the risk of negative equity. However, when prices fall, and interest rates rise, consumers with minimal down payments risk “going underwater.”

Homeowners lost $108.4 billion in equity this year. Washington, California, and Utah households saw their home equity drop by $5,400 in the first quarter of 2023. If prices drop 5%, over 200,000 households could go underwater on their mortgages.

Negative equity makes selling or refinancing a home harder, trapping homeowners. When house prices dropped dramatically overnight during the 2008 financial crash, the problem erupted into a crisis.

When a homeowner experiences negative equity, they frequently file for foreclosure.