In the United States, the so-called 'underwater dwellings,' where housing prices fall below loan amounts, are rapidly increasing. Cases of dwellings where owners cannot fully repay their loans even if they sell their homes are surging among those who purchased properties at the peak of the COVID-19 pandemic, signaling unusual activity in the U.S. housing market.
According to a report by The Wall Street Journal (WSJ) on the 24th (local time), citing a survey by the financial data company Intercontinental Exchange (ICE), the number of dwellings classified as underwater in the U.S. exceeded 500,000 as of April this year. This is the highest figure in five years. By region, the proportion of underwater dwellings was high in suburban cities that experienced a dramatic influx of migration during the pandemic, such as Austin, Texas (4.2%), San Antonio (4.3%), Cape Coral, Florida (7.8%), North Port (3.8%), and Lakeland (4.4%).
'Underwater dwellings' refer to a state where the housing price has fallen below the remaining loan balance, effectively turning asset value negative. In this case, even if homeowners sell their property, they may not be able to repay the loans in full, forcing them to either give up the sale or incur losses.
These areas are where housing prices soared during the pandemic due to remote work, low-interest rates, and a surge in suburban migration. Buyers at that time actively utilized loans thanks to low interest rates, but since 2022, with rising interest rates and increased supply, home prices in some areas have dropped by around 20%. Regarding this, the real estate platform Zillow stated, "The price increase equivalent to a decade has been pre-reflected in the five years following the pandemic."
Underwater dwellings are particularly prevalent among homes sold during the pandemic after 2020. According to an analysis by the U.S. real estate brokerage platform Redfin, while homes purchased before the pandemic still retain high asset value, those traded at the pandemic's peak are likely to incur losses upon resale.
The increase in underwater dwellings is also affecting transaction volumes. In an underwater status, sellers must cover losses in cash when settling the balance, leading to a restriction in housing supply. This has resulted in a general slowdown in market transactions. The rising number of homeowners unable to sell their dwellings is also impacting market liquidity.
Those who purchased dwellings using government-guaranteed loans with small down payments are particularly hard hit. The Federal Housing Administration (FHA) and the Department of Veterans Affairs (VA) guarantee loans aimed at first-time homebuyers or low-income individuals, meaning there is minimal capital input, and even a small decline in home prices could lead to negative asset values.
However, experts believe this situation is unlikely to escalate into a large-scale foreclosure crisis like during the 2008 financial crisis. While loans were issued without income scrutiny then, current lending standards have tightened, and the proportion of fixed-rate loans has increased. Chen Zhao, an economist at Redfin, stated, "If individuals can maintain their jobs and consistently repay their loans, a drop in asset value will not immediately lead to a crisis."
ICE also noted, "Currently, many underwater dwelling owners are still making their monthly payments normally, and foreclosure rates remain historically low."
Experts forecast that if interest rates decrease and the economy recovers, housing prices will rebound, gradually resolving the underwater dwelling issue. However, in the short term, the aftereffects of the pandemic will likely act as a burden on the housing market in some areas.