San Diego Negative Equity Rising: What Underwater Homeowners Need to Know

If you purchased a home in San Diego during the 2021-2022 buying frenzy, recent market data may feel unsettling. According to a December 13, 2025 report, 0.6% of San Diego homeowners now face negative equity—a 0.14 percentage point increase from the previous year. With home prices falling for the fifth consecutive month, dropping 0.9% in September alone, this trend signals growing challenges for recent buyers who purchased at or near peak prices.

While 0.6% may seem modest compared to the national average of 2.2%, this represents thousands of San Diego families facing a difficult reality: they owe more on their mortgage than their home is currently worth. For homeowners dealing with job loss, divorce, relocation, or simply payment stress from high interest rates, being underwater can feel overwhelming.

But here's what you need to understand: negative equity doesn't mean you're stuck, and it doesn't automatically lead to foreclosure. This guide explains what's happening in San Diego's market, who's most affected, and—most importantly—your realistic options for moving forward.

Understanding the Current San Diego Market Reality

To grasp how we arrived at this point, you need context about San Diego's recent price trajectory and what's driving current conditions.

The 2021-2022 Price Surge Created Vulnerability

During 2021 and early 2022, San Diego experienced one of the most dramatic housing booms in its history. Prices surged approximately 23.2% in a single year, driven by record-low interest rates, pandemic-fueled demand, and intense fear of missing out (FOMO) among buyers competing for limited inventory.

According to market data from September 2025, San Diego's median home price reached $975,000 before beginning its current decline. Many first-time buyers entered the market during this peak period with minimal down payments—sometimes as low as 3-5%—using piggyback loans or accepting higher debt-to-income ratios just to compete.

Dr. Selma Hepp, Chief Economist at Cotality (the company that conducts equity analysis for the industry), points directly to this dynamic: negative equity is driven "in part by affordability challenges that have led many first-time and lower-income buyers to over-leverage through piggyback loans or minimal down payments."

Five Consecutive Months of Price Declines

The tide began turning in spring 2025. San Diego Union-Tribune reporting documented the progressive decline:

• May 2025: -0.08% decline (first warning sign)
• June 2025: -0.32% decline
• July 2025: -0.69% decline
• August 2025: -0.70% decline
• September 2025: -0.9% decline (most recent data)

Cumulatively, prices are now down 0.66% year-over-year, with the Case-Shiller Index confirming these declines both locally and nationally. While San Diego's correction remains less severe than markets like Florida or Phoenix, the consistent downward trajectory is eroding equity for anyone who purchased with less than 5-10% down during 2021-2022.

Equity Loss: California Homeowners Hit Hardest

The financial impact extends beyond just price declines. CNBC analysis of recent equity data reveals that California homeowners have lost an average of $32,500 in equity over the past year—more than double the national average of $13,400.

For San Diego specifically, this means a homeowner who purchased a $900,000 property in early 2022 with 5% down ($45,000) has likely seen their equity position erode significantly or disappear entirely, especially after factoring in closing costs, which typically consume 2-3% of the purchase price.

Data source: CoreLogic Q3 2025 and CNBC equity analysis

Who Is Most at Risk in San Diego?

Negative equity doesn't affect all homeowners equally. Specific buyer profiles face elevated risk based on when they purchased, how much they put down, and which neighborhoods they chose.

Recent Buyers with Minimal Down Payments

If you purchased between January 2021 and June 2022 with less than 10% down, you're in the highest-risk category. Here's a realistic scenario:

• Purchase date: March 2022
• Purchase price: $850,000 (near peak)
• Down payment: 5% ($42,500)
• Loan amount: $807,500
• Closing costs: ~$25,000 (out of pocket)
• Current market value (December 2025): ~$792,000 (7% below purchase price)
• Current loan balance: ~$795,000 (after 3.5 years of payments)
• Equity position: Approximately -$3,000 underwater

This homeowner is technically underwater before accounting for selling costs (6% agent commissions, transfer taxes, etc.), which would push them $50,000+ in the hole if they tried to sell traditionally.

FHA and VA Buyers

Buyers who used FHA loans (3.5% down) or VA loans (0% down) during the peak are particularly vulnerable. While these programs enabled homeownership, they left minimal equity buffer against price corrections.

Neighborhoods with Steeper Corrections

While comprehensive neighborhood-level data isn't publicly available yet, real estate professionals report that areas farther from the coast—East County communities like El Cajon, Santee, and parts of Chula Vista—typically experience more pronounced price swings than coastal neighborhoods like La Jolla, Pacific Beach, or Coronado, where land scarcity provides more price stability.

San Diego neighborhoods most impacted by recent price declines and negative equity risk

What Negative Equity Actually Means for You

Being underwater on your mortgage is stressful, but it's crucial to understand what it does and doesn't mean for your situation.

If You Can Afford Your Payments

If you're employed, making your mortgage payments comfortably, and don't need to move, negative equity is primarily a paper problem. Financial experts at Bankrate note that homeowners in this position often benefit from "waiting it out"—continuing to make payments gradually reduces your principal balance while giving the market time to stabilize or recover.

Your payment goes toward principal reduction each month, and San Diego's chronic housing shortage suggests prices won't fall indefinitely. The same supply constraints that drove prices up—strict zoning, limited buildable land, environmental regulations—still exist and will likely support prices long-term.

If You Need to Sell

This is where negative equity creates real challenges. Life circumstances don't pause for market cycles. If you're facing job relocation, divorce, death of a spouse, inability to afford payments, or other circumstances requiring you to sell, being underwater removes the traditional path of listing with an agent and walking away with proceeds.

But you have options—some better than others depending on your specific circumstances.

Your Options When Underwater in San Diego

Let's examine each realistic path forward, including pros, cons, and what they mean for your financial future.

Compare your options for resolving negative equity in San Diego with credit impact and timeline

Option 1: Bring Cash to Closing (Out-of-Pocket Payment)

According to HomeLight's analysis, the simplest solution for selling with negative equity is paying the shortfall yourself. If you owe $400,000 but your home sells for $375,000, you bring $25,000 (plus selling costs) to closing.

Pros:

• Preserves your credit score completely
• Allows you to move on immediately
• No complex lender negotiations
• Clean break from the property

Cons:

• Requires significant liquid assets
• May deplete savings or emergency funds
• Still lose your original down payment and equity payments

Best for: Homeowners with savings, family assistance, or equity in other assets who need to relocate for high-paying jobs or unavoidable life circumstances.

Option 2: Short Sale with Lender Approval

A short sale occurs when your lender agrees to accept less than the full mortgage balance, allowing you to sell without bringing cash to closing. In California, this option carries important protections.

California law (SB 931 and SB 458) prohibits deficiency judgments on short sales of 1-4 unit residential properties. This means your lender cannot pursue you for the shortfall after a short sale—a critical protection that doesn't exist in many states.

Pros:

• No deficiency judgment allowed in California
• Avoid foreclosure on your record
• Less credit damage than foreclosure (typically 100-150 point drop vs. 200-300 for foreclosure)
• No out-of-pocket payment required
• Lender cannot require additional compensation beyond sale proceeds

Cons:

• Requires documented financial hardship
• Lender approval process takes 2-6 months
• Still damages credit (remains on report for 7 years)
• May affect future mortgage qualification (typically 2-4 year waiting period)
• Not guaranteed—lender may deny request

Best for: Homeowners who can document hardship (job loss, divorce, medical bills, death of income earner) but cannot afford to bring cash to closing.

Option 3: Cash Buyer Sale

Cash buyers purchase properties directly without traditional financing, often in as-is condition. While you'll typically receive below retail market value, cash buyers can sometimes work with your lender on short sale negotiations or structure creative solutions.

Pros:

• Fast closing (7-14 days typical)
• No repairs or improvements required
• No showings or listing stress
• Experienced with short sale process
• May cover some or all of shortfall in certain situations
• Certainty of closing (no financing contingencies)

Cons:

• Typically 10-20% below retail market value
• Still requires lender approval if underwater
• Must vet legitimate buyers carefully

Best for: Homeowners who need speed, certainty, or can't afford repairs, showings, and months of traditional listing uncertainty.

Option 4: Loan Modification or Forbearance

If your goal is to stay in the home but you're struggling with payments, Rocket Mortgage outlines modification options that can reduce your interest rate, extend your loan term, or temporarily reduce payments.

Pros:

• Keeps you in the home
• Can make payments affordable
• Gives time for market recovery
• Minimal credit impact for modifications

Cons:

• Doesn't solve negative equity
• Forbearance only delays—doesn't eliminate—payments
• May extend total loan cost
• Not available if you're simply underwater (requires payment difficulty)

Best for: Homeowners with temporary financial setbacks who want to remain in the property.

Option 5: Rent the Property

If you need to relocate but don't need immediate equity, converting your home to a rental property allows you to keep paying down the mortgage while market conditions improve.

Pros:

• Rental income covers mortgage (if cash-flow positive)
• Maintain ownership for future appreciation
• Tax benefits of rental property ownership
• Gradually build equity through tenant payments

Cons:

• Landlord responsibilities (maintenance, tenant issues)
• May need to qualify for second mortgage on new home
• Risk of vacancy or problem tenants
• Delayed resolution of situation

Best for: Homeowners relocating for work who can afford a second housing payment temporarily and want to preserve long-term appreciation potential.

California's Unique Protections for Underwater Homeowners

If you're facing negative equity in San Diego, you have significantly more protection than homeowners in most other states, thanks to California's anti-deficiency laws.

Non-Recourse Purchase Money Loans

California Code of Civil Procedure Section 580b prohibits deficiency judgments on purchase money loans (loans used to buy the property) for 1-4 unit residential properties. If you foreclose or short sale on your original purchase loan, the lender cannot pursue you for the difference.

Critical caveat: This protection does NOT apply if you refinanced your loan. Refinancing converts your purchase money loan into a regular loan, exposing you to deficiency liability. If you refinanced to take cash out or get a better rate, you've lost this protection.

Short Sale Protections (SB 931 and SB 458)

California extended anti-deficiency protection specifically to short sales through legislation passed in 2010-2011. These laws prohibit lenders from:

• Pursuing deficiency judgments after short sale
• Requiring borrowers to pay additional compensation beyond sale proceeds
• Demanding promissory notes or other obligations as condition of approval

This protection applies to both first mortgages and junior liens (like second mortgages or HELOCs) that consent to the short sale.

Tax Implications

Under federal law, forgiven mortgage debt from short sales or foreclosures can be treated as taxable income. However, the Mortgage Forgiveness Debt Relief Act (periodically extended by Congress) has historically excluded this "phantom income" from taxation for primary residences. Consult a tax professional about current law, as these provisions expire and get renewed periodically.

How to Determine Your Exact Equity Position

Before taking any action, you need an accurate assessment of where you actually stand. Here's how to calculate your true equity position:

1. Request payoff statement: Contact your lender for the exact payoff amount (different from your monthly statement balance)
2. Get current market value: Request a Broker Price Opinion (BPO) or comparative market analysis (CMA) from a local real estate agent, or pay for a formal appraisal ($400-600)
3. Calculate selling costs:
   • Agent commission: 5-6% of sale price
   • Title and escrow fees: 1-2% of sale price
   • Transfer taxes: varies by county (San Diego is approximately 0.11%)
   • Outstanding property taxes or HOA dues
   • Any negotiated buyer credits
4. Calculate net position: Sale price minus (payoff + selling costs) = your actual cash position

If the final number is negative, you know the exact shortfall you'll need to address through one of the options above.

Warning Signs You Should Act Now

While negative equity alone isn't an emergency if you can afford payments, certain red flags indicate you should explore your options immediately rather than waiting:

• Payment stress: You're struggling to make monthly payments or using credit cards to cover shortfalls
• Adjustable rate reset: Your ARM is approaching adjustment date with higher payments coming
• Job uncertainty: Your employment is unstable or you're facing likely layoffs
• Forced relocation: Job transfer, military deployment, or family circumstances requiring you to move
• Missed payments: You've already missed one or more payments (foreclosure timeline starts after 90 days delinquent)
• Life changes: Divorce, death of co-borrower, medical crisis, or other hardships affecting affordability
• Continued price declines: Your neighborhood shows signs of accelerating price drops

Dr. Selma Hepp's warning about negative equity "signals possible market difficulties ahead" shouldn't be ignored. While no one can predict exactly where San Diego prices will go, acting while you still have options is smarter than waiting until foreclosure is imminent.

What to Avoid When Underwater

Desperation leads to poor decisions. Here's what NOT to do:

Don't Simply Walk Away

"Strategic default"—intentionally stopping payments when you can afford them—damages your credit severely and may expose you to deficiency liability if you've refinanced. Foreclosure remains on your credit for 7 years and affects your ability to rent, get jobs requiring background checks, and qualify for future mortgages.

Don't Fall for Scams

Distressed homeowners attract predatory schemes. Avoid anyone who:

• Asks you to sign over your deed "temporarily"
• Promises to stop foreclosure for upfront fees
• Guarantees loan modification approval
• Advises you to stop communicating with your lender
• Isn't licensed (verify real estate licenses at dre.ca.gov)

Don't Ignore Your Lender

If you're struggling, contact your servicer's loss mitigation department immediately. Lenders prefer workout solutions to foreclosure and may offer options you don't know exist. Ignoring the problem guarantees it gets worse.

Don't Refinance for Quick Cash

If you're barely above water, don't refinance to pull out cash or consolidate debt. This eliminates California's purchase money protection and increases your underwater position.

The Path Forward: Making Your Decision

Your specific situation determines your best path. Use this decision framework:

If you can afford payments and don't need to move: Stay put. Continue building equity through principal reduction and give the market time to stabilize. San Diego's supply constraints suggest long-term appreciation remains likely.

If you need to move but have savings: Consider bringing cash to closing if the career opportunity or life circumstance justifies the expense and your new situation compensates for the loss.

If you need to move but lack savings: Pursue a short sale with lender approval. California's anti-deficiency protection makes this viable. Start the process early—lender approval takes months.

If you need speed and certainty: Explore cash buyer options. While you'll receive below-market value, the combination of quick closing, no repairs, and experienced short sale navigation may justify the discount.

If you're facing imminent foreclosure: Act immediately. Once you're 90+ days delinquent, your options narrow dramatically. Contact a HUD-approved housing counselor (free service) and explore emergency forbearance or modification.