Share of sellers with losses hits double-digits in one market

While the number of investors selling houses at a loss has been on the rise as rates have gone up, the share has remained relatively low for the typical homeowner outside of a market like San Francisco because of the supply-driven resilience in prices.

The percentage of all Golden Gate City sellers in this category, based on the difference between the purchase and sales price of the home, was 12.5%, but that's over four times the U.S. average, according to a report Wednesday from online real estate brokerage Redfin.

And San Francisco, while the only market in Redfin's report generating overall seller-loss percentages in the double digits, isn't the only one experiencing relatively higher numbers in that category due to local factors like a previous runup in prices that proved to be excessive.

"There are markets where prices accelerated more rapidly than in other markets, so the correction has been a little more severe," said Rick Sharga, founder and CEO of consultancy CJ Patrick, noting that Boise, Idaho serves as another example of this.

Redfin's study anecdotally notes at least one instance in which a local agent reported that a seller had to take a $100,000 loss because remote work at an employer in Seattle ended.

On the other hand, there are some markets where virtually no sellers take a loss, like San Diego and Boston. In markets like those two, Providence, Rhode Island; Kansas City, Missouri and Fort Lauderdale, Florida, the share is around just 1%.

Interestingly, while this shows there's a range of seller outcomes in the market, mortgage companies don't necessarily need to worry that a relatively higher incidence of seller loss is necessarily a sign of negative equity, even in an overheated market like Northern California.

"I would bet that the people who are losing money are people who are either moving somewhere more affordable, so they don't really need that equity for the next time, or it's investors,"  said Darryl Fairweather, Redfin's chief economist, when asked about this.

In line with that thinking, other studies have found that even in San Francisco, the share of homeowners with mortgage balances exceeding their property values is low. That generally alleviates concerns that borrowers there could have diminished incentive to repay.

"Negative equity share is much lower in SF (at 0.8%) compared to national levels (at 2%)," said Selma Hepp, chief economist at CoreLogic, in an email response to an inquiry from this publication.

Sizable average down payments of 20% or more drive the trend, she said.

"Home prices in SF were down about 10% peak-to-bottom, which leaves all of the borrowers with a 20% downpayment still above water," said Hepp.

Lower loan-to-values are tough to maintain given affordability pressures on the market equity levels so lenders might have to think hard about how to balance that against what's likely to be a continued but slow decline in San Francisco home values.

The latter is a concern, but not an immediately dire one as evidenced by the low level of negative equity in the market.

"The equity was so high to begin with it's not like there's a danger of a housing meltdown. The numbers are coming down from extremely high levels," Sharga said.

To put it in perspective, consider that in the wake of a worst-case scenario like the Great Recession, the share of sellers taking losses in San Francisco peaked at around 50% and slowly fell thereafter as the market recovered, according to Fairweather.

The recent increase is still notable as prior to the recent uptick the percentage hadn't been above 10% since around 2014.

It'll likely remain relatively high even though the share of homes sold at a loss saw a slight decline from a level closer to 14% earlier this year. Short-term improvement in the broader housing market likely drove this, but higher rates could reverse that.

And San Francisco in particular still appears to be a market that's losing residents.

"People want to buy in San Francisco, but the people who buy are generally going to do it for the lifestyle, not for an investment at this point," said Fairweather. "San Francisco is a place that people are leaving. It's one of our top outmigration centers."

Other markets where the share of sellers is higher than a national average, which is around 3% according to Fairweather, include Detroit, (6.9%), Chicago (6.5%), New York (5.9%) and Cleveland (5.8%).

"These are all places that people have been leaving even before the pandemic, but the trend really turned on during the pandemic," said Fairweather. 

While returns to the office might reverse some pandemic migration trends in overheated markets, areas with long-term outmigration aren't likely to turn around while rates are high, particularly if taxes are too.

"Detroit and Chicago also have high property taxes, and when you have high property taxes, that tends to cut into equity gains," Fairweather said.