Equity is shrinking, buyers hold the leverage, deals are falling apart, and rents are splitting the state in two — a snapshot of a California housing market under strain
Homeowners, you may have a problem.
The percentage of equity-rich homeowners has declined to a five-year low, after dropping for five consecutive quarters, according to ATTOM Data. And the rate of homes severely underwater increased during the second quarter.
It’s a big one-two punch and the latest evidence of a hard-hit housing market.
Now, before homeowners freak out too much, many are still on very solid ground. But compared to a year ago, the data deserve some attention and owners should be wary.
Fresno flounders
About 46% of homeowners with a mortgage were considered “equity rich,” meaning their mortgage remaining was less than half of the estimated market value of their home.
Good but down from 57% — or 11 percentage points – a year ago.
All eight regions had a decline of equity-rich homeowners, including dramatic drop of 30 percentage points in Fresno (see table, below).
The Central Valley city, one of the most affordable in the state, also had a huge increase in the percentage of severely underwater mortgages, from 2% to 11% during the past year.
Fresno has an abundance of owners who bought their homes with little money down, sometimes as little as 3%, so any price decline greatly affects the equity-rich data and the severely underwater percentage.
Severely underwater mortgages are homes where the owner owes 25% or more than the current value of the property. The closely watched info could be the first warning sign of an increase in foreclosure notices and a troubled housing market.
‘A trend worth watching’
Right now, California homeowners are OK.
Only 2.3% of homes are considered severely underwater in the state, one of the lowest rates in the nation. But all eight regions had an increase in the percentage of severely underwater mortgages (see table, below).
California followed how the rest of the nation fared.
Nationwide, about 41% of homeowners with a mortgage were considered equity rich during the second quarter compared to 47.4% a year ago. ATTOM estimates 3.2% of mortgages were severely underwater compared to 2.7% a year ago.
“These two measures of home equity strength, the rates of equity-rich and seriously underwater homes, remain healthier than they were prior to 2020,” said Rob Barber, CEO of ATTOM. “However, both have been moving in less favorable directions over the past year, suggesting a trend worth watching.”
Two decades ago, the percentage of equity-rich owners dropped, and underwater mortgages increased with the housing market meltdown that prompted the Great Recession.
But economists and housing experts say the market is much different today. Many homeowners can tap a ton of equity or sell their home for a still-hefty profit if necessary, and underwater mortgages are more of a problem if the economy slows, layoffs increase and prices tumble.
Fewer homeowners feeling rich, more underwater in July
| City | Equity rich | Seriously underwater mortgages |
|---|---|---|
| California | 45.6% | 2.3% |
| Bakersfield | 35.8% | 2.1% |
| Fresno | 18.1% | 10.9% |
| Los Angeles | 51.1% | 1.8% |
| Riverside | 39.6% | 2.2% |
| Sacramento | 39.1% | 2.0% |
| San Diego | 52.% | 1.4% |
| San Francisco | 47.2% | 2.2% |
| San Jose | 59.1% | 1.1% |
Source: ATTOM Data
Seller beware: Buyers call the shots in most cities in California
Buyers are in command in the current housing market in much of California, and many are walking away when their demands are being overlooked.
Buyers easily outnumber sellers in seven of the eight regions in the state, including only three buyers for every 10 homes on the market in Riverside, according to Redfin. In Los Angeles, there are 62% more sellers – trying to move about 22,730 homes – than potential buyers.
It’s an about-face that started a couple years ago and continues to gain strength with a record-low number of buyers in California and nationwide.
‘More options and more negotiating power’
San Francisco, with an abundance of deep-pocketed Ai employees, is the only market where buyers outnumber sellers, and the results are fast-rising prices and quick sales. The basic economic theory of supply and demand.
The Bay Area is an outlier compared to the rest of the state.
“Buyers are dropping out faster than sellers, giving the buyers who remain more options and more negotiating power,” said Redfin senior economist Asad Khan. “At the same time, uncertainty around whether the Fed will hike rates – and this summer’s rising mortgage rates – are keeping many would-be buyers on the sidelines. Buyers have leverage, while motivated sellers may be willing to negotiate before the early-fall rush brings some buyers back to the market. This could be the best chance for buyers and sellers to meet in the middle.”
| City | % more sellers than buyers in July | How many more sellers than buyers in July |
|---|---|---|
| Anaheim | +35.1% | 7,424 |
| Los Angeles | +61.7% | 22,731 |
| Oakland | +21.6% | 5,752 |
| Riverside | +68.5% | 18,767 |
| Sacramento | +32.5% | 7,425 |
| San Diego | +30.3% | 7,835 |
| San Francisco | -6.3% (more buyers) | 2,297 |
| San Jose | +18.8% | 3,106 |
Source: Redfin
Let’s make a deal. Or not
Maybe, if buyers don’t walk away.
More than one of every eight (12%) are being canceled in California, as buyers get cold feet with the housing market in a deep freeze. All eight regions, from the Bay Area and the Sacramento region to San Diego, had an increase in canceled deals compared to a year ago.
Riverside, one of the most affordable markets in the state, had the highest percentage of canceled deals at 17% in July, followed by Los Angeles at 16% (see table, below).
Potential buyers walked away from 15% of deals in the Sacramento region, 2.3 points higher than a year ago – and the largest annual increase in California.
The Bay Area, again the hottest market in the nation, had the lowest percentage at 4% in San Francisco and 6.5% in San Jose. But both of those figures are higher than a year ago.
Of course, buyers cancel deals for numerous reasons, from not-so-great home inspections to rising rates. Historically, only about one of every 20 (5%) deals are canceled by buyers, according to the National Association of Realtors.
| City | Canceled deals in July | Canceled deals vs. year ago |
|---|---|---|
| Anaheim | 13.5% | +0.7 |
| Los Angeles | 16.1% | +1.4% |
| Oakland | 9.3% | +1.2 |
| Riverside | 17.2% | +0.4 |
| Sacramento | 15.1% | +2.3 |
| San Diego | 14.8% | +1.3 |
| San Francisco | 4.1% | +0.5 |
| San Jose | 6.5% | +1.3 |
Source: Redfin
Bay Area rent booms, SoCal dips
California’s one-time solid renters’ market has become a tale of two states, with the cost of apartments soaring in the Bay Area and sliding in Southern California.
San Francisco’s one- and two-bedroom apartments are leasing for $4,180 and $6,020 per month – a 23% and 26% increase during the past year, respectively, according to Zumper. Those gains, prompted by Ai employees with great-paying jobs and likely soon hefty paydays from public offerings, are easily the largest nationwide.
San Jose’s one-bedroom apartment rents have increased a modest 1.1%, but two-bedroom units are up 6.2% (see table, below), the second-largest bump during the past year in California, according to Zumper.
Other apartment-rent trackers have smaller but still significant increases for San Francisco and San Jose.
Zillow estimates rents for the Bay Area cities have increased 7% to almost 10% over the past year. Industry-tracking giant Yard Matrix estimates about 5.5% rent increases for the cities.
SoCal slump and some landlords are still willing to make a deal
In Southern California, where many new apartment communities have opened in recent years, rent has increased less than inflation or even dipped in some cities, according to Zumper.
Los Angeles’ average rent for one- and two-bedroom apartments plummeted 6% and 7%, while San Diego – one of the most stable housing markets in the state – had a 2% drop from a year ago, based on Zumper data. The other two sources had a slight dip or small gains.
“While rents are rising a bit faster than they were earlier this year, the market remains much different from the rapid growth environment seen in recent years,” said Molly Boesel, senior principal economist for Cotality. “Pricing performance continues to vary across both regions and price tiers, with higher-end rentals posting stronger gains than lower-end properties”
The boom and bust with rental rates can also be found with concessions from landlords. About one of every four renters is enjoying some form of concession – such as a few months of free rent with a one-year lease or a discount on the security deposit (see table, right), while the figure jumps to almost 40% in San Diego, according to Zillow.
July apartment rents compared to a year ago
| City | 1-bedroom | % vs year ago | 2-bedroom | % vs. year ago |
|---|---|---|---|---|
| Anaheim | $2,050 | No change | $2,690 | +1.5% |
| Bakersfield | $1,100 | +2.7% | $1,440 | No change |
| Fresno | $1,290 | No change | $1,580 | -1.3% |
| Long Beach | $1,850 | +1.1% | $2,430 | No change |
| Los Angeles | $2,170 | -5.7% | $2,970 | -6.9% |
| Oakland | $2,090 | +5.6% | $2,640 | +3.5% |
| Sacramento | $1,500 | No change | $1,850 | -2.1% |
| San Diego | $2,250 | -2.2% | $3,000 | -3.2% |
| San Francisco | $4,180 | +22.9% | $6,020 | +25.9% |
| San Jose | $2,770 | +1.1% | $3,590 | +6.2% |
Source: Zumper
Wealthfront expands mortgage lending to California
For homebuyers, every dollar counts. Slightly lower interest rates can save buyers a couple hundred dollars every month – and many thousands of dollars over a 30-year mortgage.
As mortgage rates rise – they are expected to climb and remain in the 6.8% range for the next several months, according to Fannie Mae – home lenders are hustling for an edge to entice homeowners.
Wealthfront Home Lending is the latest with a pitch to borrowers.
The company has announced a digital-first mortgage in California, claiming to save homeowners about 50 basis points or more.
The cost-savings come with a catch or, more appropriate, a click. Basically, software replaces the often-labor intensive paperwork process.
“Buying a home is one of the biggest financial decisions people make, yet the mortgage process has remained unnecessarily complex and costly,” said CEO David Fortunat. “We believe affordability is as much a technology problem as an economic one …”
The Palo Alto-based company claims borrowers with a $1 million home could save about $260 per month – or almost $95,000 over a 30-year mortgage compared to the national average.
Of course, applicants should do their homework and learn more on the Wealthfront website.
