U.S. Homeowners Four Times as Likely to Be Equity Rich Than Underwater

U.S. Homeowners Four Times as Likely to Be Equity Rich Than Underwater

3 min read
Andrew Syrios

Andrew Syrios has been investing in real estate for over a decade and is a partner with Stewardship Investments, LLC along with his brother Phillip and father Bill. Stewardship Investments focuses on buy and hold and particularly the BRRRR strategy—buying, rehabbing, and renting out houses and apartments throughout the Kansas City area.

Experience
Today, Andrew has over 300 properties and just under 500 units. Stewardship Properties on the whole was founded by his father Bill in 1989 and has just over 1,000 units in six states.

Stewardship Investments, LLC has been named to the Inc. 5000 list for fastest growing private companies twice (2018, 2019) and the Ingram 100 list for fastest growing companies in Kansas City (2018, 2019), as well as the Kansas City Business Journal’s Fast 50 (2018).

Andrew has been a writer for BiggerPockets on real estate and business management since 2015 and appeared on episode 121 of the BiggerPockets Podcast with his brother Phillip. He has also contributed to Think Realty Magazine, REI Club, Elite Daily, Thought Catalog, All Business, KC Source Link, The Data Driven Investor, and Alley Watch, as well as his personal blog at AndrewSyrios.com. Andrew and Phillip also have a YouTube channel focused on business and real estate.

Education
Andrew received a bachelor’s degree in Business Administration from the University of Oregon with honors and his master’s in Entrepreneurial Real Estate from the University of Missouri in Kansas City.

Accreditations
He has also obtained his CCIM designation (Certified Commercial Investment Member) and his CPM (Certified Property Manager).

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A new study based on mortgage and deed of trust data by ATTOM Data Solutions has found that American homeowners are far more likely to be equity rich than seriously underwater in their mortgage.

An equity-rich home was defined as one in which “the combined estimated amount of loans secured by those properties was 50% or less of their estimated market value.” On the other hand, seriously underwater properties were those “with a combined estimated balance of loans secured by the property at least 25% more than the property’s estimated market value.” 

Equity-rich properties included 14.5 million residential properties in the United States, which “represented 26.5%, or about one in four, of the 54.7 million mortgaged homes.” The report also notes that “3.6 million, or one in 15, mortgaged homes” were seriously underwater.

This was, however, for the first quarter of 2020, before the coronavirus pandemic and subsequent lockdowns were put in place. What effect that will have on the real estate market is, at this time, uncertain. But the most educated predictions are not encouraging.

The report even notes that the percentage of equity-rich homes in Q1 (26.5%) was “down slightly from the 26.7% level in the fourth quarter of 2019.” This is further evidence the United States was already on the eve of a recession before the coronavirus hit as many (including myself) had predicted.  

Indeed, while one in 15 homes being seriously underwater may not sound like a lot, it’s actually distressing that there are any such homes left after we had just lived through the longest-ever economic expansion in American history (126 months).

keep-tenants-happy

Related: 8 Ways to Identify the Best Places to Buy Rental Property

Equity Rich vs. Underwater Property by Region

The regional results tended to be the opposite of ATTOM Data Solutions’ previous report on which areas were more affordable to buy and which were more affordable to rent. This isn’t particularly surprising as the more affluent markets will have more homeowners who drive up the price of housing and make it less affordable to purchase by competing with each other to buy properties. Then, as housing prices in those areas increase, people who already own properties will see the amount of equity in their homes increase substantially above their already-existing mortgage.

Regarding this study, the areas that were most likely to have equity-rich properties tended to be more affluent, and those states with the least were more economically distressed. As the report notes,

“The top 10 states with the highest share of equity-rich properties in the first quarter of 2020 were all in the Northeast and West regions, led by California (42.3% equity-rich), Hawaii (39.0%), Vermont (38.2%), Washington (36.6%), and Oregon (34.0%).

“States with the lowest percentage of equity-rich properties were Louisiana (13.5% equity rich), Oklahoma (14.7%), Illinois (15.2%), Arkansas (16.3%), and Alabama (16.3%). Those were the same states with the five lowest levels in the fourth quarter of 2019.”

It was a similar story for the county data with the most equity-rich counties tending to be in affluent Northeast and Western states and the lowest percent of equity-rich houses concentrated in the Southeast. For example, San Mateo County in California had the highest percentage of equity-rich homes in the country at 72.3%.

Not surprisingly, the states with the most seriously underwater properties were also mostly in the South, Midwest, and Rust Belt areas.

“The top 10 states with the highest shares of mortgages that were seriously underwater in the first quarter of 2020 were all in the South and Midwest regions, led by Louisiana (17.3% seriously underwater), Mississippi (16.9%), West Virginia (15.7%), Iowa (14.2%), and Arkansas (13.0%).”

Youngstown, Ohio, had the highest percentage of seriously underwater properties of any city at 17.0%.

Related: 2020 BPInsights Market Study: Top 25 U.S. Cities for Cash Flow & Appreciation

Aerial view of a green leafy suburb

Key Takeaways for Real Estate Investors

So many things are, of course, in flux with all of the economic uncertainty due to the coronavirus. That being said, this study does have a few key takeaways for real estate investors.

  1. The small decrease in the percentage of homes that are equity rich prior to the coronavirus pandemic and the substantial number of houses that were still seriously underwater provide further evidence the U.S. was already heading toward a recession. Thus, COVID-19 will only exacerbate the economic turmoil. So, it would be wise to expect a fairly serious recession and not a “V-shaped” recovery.
  2. There are still a large number of houses that are equity rich out there—14.5 million to be exact.

Equity-rich houses provide the best opportunities for real estate investors as the owner can actually afford to sell at a discount without doing a short sale or bringing money to the table.

A good number of these houses need repairs the owner does not want to do, are located in a state far away so the owner does not want to manage it, or are properties the owner just plain doesn’t want to deal with at all. Equity-rich houses with owners who don’t want them are great opportunities for real estate investors.

Thus, this report highlights that there are still opportunities out there.

In a market like this, however, it’s important to be extra careful. You don’t want to try to catch a falling knife. Real estate values are likely to decline in the near future. So, make sure to discount your offers at least an extra 5-10% to compensate, and don’t go out on any limbs or take any big chances.

A recession doesn’t mean you should stop buying, but it sure does mean you should be much more careful and conservative when you do buy.

You can see the entire ATTOM Data Solutions study here.

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A new study found that most American homeowners are "equity rich," meaning the combined estimated amount of loans secured by those properties was 50% or less of their estimated market value. The report goes on to highlight that there are still opportunities to be had. Find out where here.