Washington State Homeowners Experience Significant Equity Loss as Housing Market Cools

The cooling housing market in Washington has caused a decline in homeowners’ equity, surpassing other states in the country. According to real estate data company CoreLogic, Washington homeowners experienced an average equity loss of about $74,300, marking an 18% decline from the first quarter of the previous year to the first quarter of 2023.

Despite this decline, the percentage of homeowners with negative equity remains relatively low. Only 2% of mortgages in Washington have homeowners owing more than their property’s value, aligning with the nationwide average. This is a slight increase from previous years when the share of underwater mortgages hovered around 1.5%.

In the Seattle area, the percentage of homeowners with negative equity is even lower, at just 0.7% as of April, according to data from Black Knight. Although this represents a larger share compared to recent pandemic years, it is still significantly lower than the levels seen after the 2008 housing market crash when more than a third of Seattle-area mortgages were underwater.

Typically, homeowners can offset declines in equity by waiting for the market to rebound before selling their homes. However, those who purchased homes during the peak of the red-hot pandemic market and are now compelled to sell due to job loss, divorce, or other factors may be more affected.

The recent decline in equity reflects the volatile nature of the housing market in recent years. Home values experienced record-breaking growth, followed by a surge in interest rates, resulting in a rapid cooling of the market and a drop in home prices. However, due to the high initial values, homeowners could experience significant declines in value without a substantial increase in the number of underwater mortgages.

Despite the equity loss of over $74,000 for Washington homeowners in the past year, they still gained $116,000 due to soaring home prices the year before, as per CoreLogic data. The pandemic has contributed to substantial gains in home values, according to CoreLogic Chief Economist Selma Hepp.

In addition, homebuyers in expensive and competitive markets like Washington tend to make higher down payments, which provides them with greater equity compared to other homeowners as soon as they become homeowners, explained Redfin Senior Economist Sheharyar Bokhari.

Between January 2021 and September 2022, only 1.6% of Seattle-area homeowners, encompassing a period of high market activity, find themselves in negative equity, as per Redfin data.

According to Bokhari, it is likely that those who recently entered the market during the frenzy are wealthier individuals with substantial down payments. This financial advantage allowed them to emerge victorious in bidding wars, which is why the number of homeowners in negative equity remains relatively low.

Although the Seattle-area housing market gained momentum this spring, it still experiences reduced activity and lower prices compared to the previous year. In May, the median home price in King County sat at $910,000, recording a 9% decline in comparison to the preceding year, as reported by the Northwest Multiple Listing Service.