Many Recent Buyers Believe They Overpaid for Their Homes as the Market Corrects

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In March 2020, Mark Joseph bought his first home: a spacious three-bedroom, 2.5-bedroom house in Saint Louis. He and his wife had recently had their second child, and they badly wanted more square footage.

Even in those earliest days of the COVID-19 pandemic, the housing market was very competitive. Joseph was convinced “someone else would swoop in and take it away if I didn’t make a strong offer,” he says, so he paid more than the asking price.

When Joseph moved in, he noticed the HVAC system, plumbing, and electrical wiring were in need of some costly repairs as he’d skipped having them inspected. That unexpected work exceeded his initial budget.

Joseph, founder of Parental Queries, a website devoted to pregnancy and child rearing, has since had trouble keeping up with his mortgage payments. And despite his home value rising, it hasn’t gone up as much as he initially anticipated.

“Little did I know then that overpaying for my home meant overburdening myself with an increased mortgage payment for years to come—something I could have done without during such a tumultuous time,” says Joseph, 32.

Joseph is not alone.

At the height of the pandemic, many homebuyers stretched their budgets into the danger zone as they found themselves caught up in bidding wars, offering whatever it took to secure a home of their own. Now with price growth slowing, and even falling in many markets, many of those now-homeowners believe they overpaid for the residences.

Some are even seeking legal recourse. There was a 9% rise in the number of lawsuits filed against real estate professionals from 2021 to 2022, according to data from Victor Insurance Managers, a firm representing over 14,000 real estate brokerages, mortgage lenders, and other industry professionals.

Many are recent homebuyers who are frustrated to discover that their new home needed costly repairs or otherwise has a problem that was missed in a home inspection. So they sue to recoup the costs of the repairs.

“This is actually fairly typical in any down cycle,” says Zach Vollmer, real estate leader at Victor. “No one wants to be the last person in buying at the height of the market. It breeds a sense of resentment.”

Real estate agents are often included in these suits because homeowners believe they should have warned them about these problems as well as any future shifts in the housing market. They typically carry insurance that can pay out such claims.

Some recent buyers are now underwater on their mortgages

Plenty of recent buyers find themselves watching nervously as their neighbors’ homes sell for less than what they paid for their own just a few months earlier—leading them to the inevitable conclusion that their own home valuations appear to be falling.

Roughly 11% of homeowners who purchased their properties last year with a mortgage were a bit underwater on those loans at the end of November, according to the most recent Black Knight data provided to Realtor.com®. Black Knight is a mortgage data and analytics provider. This is partly because home prices traditionally peak over the summer and then fall during the cold weather months. So even in a more normal market, someone who bought in June might see their home value drop off a little by December.

But this percentage of underwater borrowers is more than normal—the highest since 2011, according to Black Knight.

The housing correction that’s led to prices coming down in some parts of the country is a result of higher mortgage interest rates, which more than doubled last year.

During the height of the pandemic, rates had dropped to record lows, bottoming out in the mid-2% range. Since buyers weren’t paying as much in interest, they could afford previously unthinkably high home prices. But when mortgage rates shot up, briefly topping 7% last year, buyers dropped out of the market in droves. That slammed the brakes on prices, forcing sellers and builders to slash asking prices.

Home prices have even fallen in some of the most juiced-up housing markets that attracted legions of new residents during the pandemic, like Austin, TX; Phoenix; and Boise, ID.

But real estate experts urge new homeowners not to panic. Even in places where prices have dipped, they’re not down by much. And they expect prices will rise over the long term, so recent buyers who don’t intend to sell in the next year or two should generally be just fine.

“If you feel that you overpaid, try not to beat yourself up,” says Ali Wolf, chief economist of building consultancy Zonda. “Housing will go through cycles. … It still is a good long-term investment.

“Your monthly payment is now fixed, you’re paying to yourself, and in the long run, you’re building equity,” she adds.

The exception are those who purchased their home a year ago and now need to sell, especially if they’re in rapidly cooling real estate markets. Even those in more stable parts of the country could lose money even if prices haven’t fallen due to closing costs and other fees.

“If you’re trying to move in the next year or two, you’re probably going to feel the impact,” says Wolf.

Most recent homebuyers are still happy with their purchases

Most people are happy after they purchased a home, even if they had to deal with a bidding war or spend over the asking price.

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Despite the housing market correction, just 1 in 5 homeowners who bought their properties within the past two years regretted doing so, according to a recent survey from online financial services marketplace LendingTree.

“Most people are actually pretty happy after they purchased a home, even if they had to deal with a bidding war or spend over the asking price,” says Jacob Channel, a senior economist at LendingTree.

They’re building wealth they can pass down to future generations, they no longer have to deal with a landlord’s rules and rent increases, and they “have the freedom to paint [their] walls neon pink if that floats [their] boat,” says Channel.

Those who bought during the pandemic and secured a low mortgage rate might now be in a better financial place even if they paid what now may seem like an astronomical sum for their homes. They likely have lower monthly mortgage payments. That’s because mortgage rates have risen from the mid-2% range in 2021 to over 6%. And while that may not sound like much of an increase, it can add hundreds of dollars to a monthly mortgage payment.

In comparison, small drops in home prices don’t translate into much savings. Even if home prices dropped 25%, buyers would still be paying more than they would have if prices were higher but rates were back in the 3% range as they were early last year.

Rates averaged 6.15% for 30-year fixed-rate loans in the week ending Jan. 19, according to the most recent Freddie Mac data. (The calculation uses the national median price tag of $400,000 and assumes buyers put down 20% on their purchase. It does not factor in taxes, insurance, and other costs.)

“Your interest rate is super important,” says Channel. “When you talk about the difference between 3.5% and 6.5%, it might not sound huge at first. But in mortgage land, that’s giant.”

Housing is cyclical: One year it’s up, the next it could be down

Homebuyers, sellers, and owners need to come to grips with the Newtonian laws of real estate: What goes up can also go back down again. But most real estate economists don’t expect the market to crash again like what happened during the Great Recession, where prices fell more than 30% in some parts of the country.

Most bad mortgages have been eradicated from the market. And this time around, there is a severe housing shortage leading to a greater demand for housing than there are homes to go around.

“There’s going to be fluctuations in the housing market, and you’re going to have to turn a blind eye,” says Wolf. “It’s going to feel a little dicey as the housing market rebalances over the next 12 months.”

Channel was quick to point out, though, that a decade after the housing bust, home prices had rebounded and then some in most of the nation.

“Timing the market is really hard—if not completely impossible,” says Channel. “The longer you keep your property, the more likely it is to go up in value and the more likely it is to pay off for you.”

He also pointed out that, while in the short term, it’s often cheaper to rent rather than buy in different parts of the country, that calculation often changes over time.

Renters might have to cough up a security deposit or sometimes even two months rent upfront, but they’re not on the hook for a down payment for a home plus closing costs on top of renovations, maintenance, and the plumber’s bill if the toilet overflows.

But over decades, rents rise. And eventually, they might be higher than a monthly mortgage payment.

“If you’re renting a house, you could see your monthly rent increase by double digits because that’s what your landlord wants to charge you,” says Channel. “If you own a home, you may see your taxes go up. But generally speaking, your payment has the potential to be much more stable, especially if you’ve got a fixed-rate mortgage. … And once you pay your loan off, your housing costs will decrease pretty significantly.”

His advice to those who believe they overpaid for their homes is to avoid obsessing over their perceived mistake.

“Obsessing over this is probably just going to drive you insane,” says Channel. “As long as your house works for you and you can afford the monthly payments … you’re probably going to be OK.”

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