Falling Home Prices Hit Hard: 10 States Where Homeowners Are Struggling with Underwater Mortgages—and What Arizona Can Learn.
Home prices across the U.S. are taking a dip, and while that might sound appealing to prospective buyers, it’s creating challenges for current homeowners. In some states, mortgages now exceed home values, leaving homeowners “underwater.” Let’s explore the 10 states most affected by this trend and what Arizona can learn to avoid similar problems.
The Economic Impact of Falling Home Prices
While cooling home prices might seem like a relief for buyers, they can signal broader economic issues for homeowners. According to real estate data provider ATTOM, several states are seeing property values drop, leading to a rise in underwater mortgages. An underwater mortgage occurs when the loan balance exceeds the home’s value by at least 25%.
Why Are Homeowners Going Underwater?
A variety of factors can cause homeowners to go underwater:
1. Economic Downturns
Local economies suffering from job losses, declining industries, or slow growth tend to see falling home values. For instance, Louisiana, Oklahoma, and Kentucky rely heavily on fossil fuels, which are facing declining demand. As jobs and populations leave these regions, home prices fall, leaving homeowners with mortgages greater than their home’s worth.
2. Natural Disasters
States like Louisiana are often hit by natural disasters, such as hurricanes, which can severely damage property values. Disasters not only reduce the value of homes but also discourage new buyers, leading to falling home prices and more underwater mortgages.
3. Overleveraging During Booms
Many homeowners find themselves underwater because they bought at market peaks, often with minimal down payments. When housing prices cool, as they are in some regions, their home’s value drops, while the mortgage remains the same.
4. Rising Interest Rates
Rising interest rates have made homebuying more expensive, which cools demand. This lower demand puts pressure on home prices, increasing the risk of recent buyers becoming underwater if prices decline.
The States with the Most Underwater Mortgages
According to ATTOM, the 10 states with the highest proportion of seriously underwater mortgages in Q2 2024 are:
- Louisiana
- Oklahoma
- Kentucky
- Mississippi
- West Virginia
- Arkansas
- Alabama
- Missouri
- Indiana
- Ohio
What Can Arizona Learn?
Arizona is not currently on the list of states with the most underwater mortgages, but it can learn important lessons to avoid falling into similar situations:
1. Watch Local Economic Trends
Arizona’s diversified economy, including technology and renewable energy, makes it more resilient than states dependent on a single industry. However, it’s crucial to monitor key industries like construction and tourism, which could be vulnerable in an economic downturn.
2. Avoid Overleveraging
With Arizona’s booming housing market, particularly in the Phoenix metro area, homeowners should be cautious of buying at peak prices. Building more equity with larger down payments and avoiding risky loans can protect against future price drops.
3. Learn from the Boom-Bust Cycle
Arizona has faced boom-bust cycles in the past, such as during the 2008 housing crash. Avoiding overbuilding and maintaining a balance between supply and demand can help protect the market from severe declines if demand slows or interest rates rise.
4. Population Growth
Arizona continues to attract new residents, which boosts housing demand. However, ensuring affordable housing keeps pace with this growth is crucial. If affordability becomes an issue, demand could cool, leading to price declines.
Looking Ahead: Arizona’s Real Estate Outlook
Arizona’s housing future depends on several factors:
- Housing Supply and Demand: Arizona’s growing population has supported strong home value appreciation. However, if the pace of development exceeds demand, prices may soften. Developers should remain cautious and aligned with demand to avoid an oversupply of homes.
- Climate and Water Supply: With ongoing droughts and water shortages, Arizona’s environmental sustainability plays a significant role in its long-term housing outlook. Areas heavily affected by water scarcity could see a drop in demand, reducing home values over time.
- Interest Rates and External Pressures: Arizona’s housing market is sensitive to national trends like rising interest rates. As borrowing costs increase, fewer people can afford homes, potentially slowing price growth or even leading to declines.
- Remote Work and Migration: The rise of remote work has drawn many out-of-state buyers to Arizona, especially from higher-cost regions like California. If remote work trends shift, Arizona’s suburban housing market might see reduced demand, particularly in areas that saw rapid growth during the pandemic.
Is There Hope for Homeowners?
Although some states are facing underwater mortgage issues, experts like ATTOM’s CEO Rob Barber believe housing demand will stabilize, eventually boosting home values. Arizona’s strong economy and continued population growth make it more resilient than other states. By staying mindful of local economic trends and avoiding overleveraging, Arizona homeowners can protect themselves from the risks seen in other regions.
