The housing market in the East Midwest and California is increasingly becoming a riskier investment

According to new research from CoreLogic, home prices continue to rise in these areas while affordability decreases. In the first quarter of 2020, one-third of all negative equity mortgages were concentrated in just three states: California, Florida, and Texas. At the same time, rising home prices and declining affordability signals what could be an impending housing crisis for these regions.

That is not to say that other areas of the country are free of financial risk. CoreLogic’s research found that mortgage delinquency rates have risen across almost all markets since the start of the pandemic. However, the effects of the pandemic have been more pronounced and longer lasting in the East, Midwest, and California.

The reasons behind this trend are multifaceted. One of the most prominent is the massive influx of capital into these areas from both domestic and foreign investors. The CoreLogic report found that 77% of foreign investment was concentrated in the East and Midwest. Foreigners tend to purchase property in higher-priced markets such as these and can often outbid local buyers on properties.

As these investors buy up real estate, the demand for housing in the region rises and, consequently, so do prices. This is significant because it leads to less affordability for residents who may not be able to compete with the foreign investors. Further compounding the problem is the fact that many of the investors are buying property only as a long-term investment, rather than buying homes to live in as many locals would.

In addition to foreign investors, another factor contributing to the housing risk in the East, Midwest, and California is the use of unconventional financing. This type of financing includes options like interest-only loans and cash-out refinances. These types of loans tend to carry higher levels of risk, as they can leave borrowers without the ability to make payments if their financial situation changes.

Finally, the low inventory of homes on the market in these regions has also played a role in the increased risk in the housing market. This shortage of available properties has put buyers in a position where they must compete in bidding wars or pay above asking price for homes. This further compounds the affordability issue as buyers must pay more for properties that are already expensive.

To sum up, the current housing market in the East, Midwest, and California is increasingly becoming a riskier investment for both buyers and lenders. Foreign investors are driving up demand for homes in these areas, which is raising prices and making it more difficult for local buyers to afford homes. Unconventional financing is also contributing to the risk, as many of the loans carry higher levels of risk to borrowers if their financial situation should change. Finally, the low inventory of homes on the market is causing a bidding war between buyers, which further drives up prices. All of these factors combined signal an impending housing crisis in the East, Midwest, and California.

This article was contributed on Oct 21, 2023