Negative Equity Continues to Stumble Economic Improvements

CoreLogic reports that “the good news” about a third consecutive quarter decline in negative equity for residential properties is not so good after all. It warns that since these gains “primarily” due to foreclosures of severely negative equity properties, and not increases in home values, are not significant enough to positively impact the still-weak economy.

CoreLogic’s chief economist Mark Fleming described the slow decline in negative equity as “the good news” that must be delivered hand in hand with the bad news about accelerating price declines that have the power to put a stop or reverse the recent improvement in negative equity.

A total of 10.8 million or 22.5% of all residential properties with mortgages were in negative equity at the end of 3Q10, down from 23% in the previous quarter.

By the end of 2Q10 there were 11 million negative equity properties backed by $2.9 trillion in mortgage debt outstanding, which brought the negative equity share to 33% and the total dollar value of negative equity to $766 billion.

Negative equity and near-negative equity mortgages accounted for 27.5% of all residential properties with a mortgage nationwide in 3Q10. However, during this year the number of borrowers in negative equity declined by over 500,000 borrowers.

In 3Q10 an additional 2.4 million borrowers had less than 5% equity in their home.
"Negative equity is a primary factor holding back the housing market and broader economy,” Fleming said.

The highest number of properties with negative equity or “underwater” (borrowers owing more on their mortgages than their homes are worth may occur because of declines in value, a mortgage debt increase or a combination of both) remains concentrated in five states.

Nevada keeps the lead with 67% of all of its mortgaged properties underwater, followed by Arizona with 49%, Florida 46%, Michigan 38% and California 32%.

The largest declines in negative equity also were concentrated in the hardest-hit states with Alaska seeing the largest decline at 1.8 percentage points, followed by at Nevada 1.6 percentage points, Arizona at 1.4, California at 1.2 and Florida at 0.9.

Idaho and Alabama, which topped the list of states with the highest home price depreciation, were the only states with noticeable increases in negative equity.

The other good news is that there are still many homeowners with more equity in their homes, including nearly half of New York borrowers who have 50% or more positive equity.

Besides New York, which leads the nation, Hawaii comes second with 43%, Massachusetts 40%, Connecticut 39% and Rhode Island 40%.

This broad picture of negative and positive equity distribution, however, becomes more complicated in states like Rhode Island where the performance and differences in equity and prices varies greatly at the county and neighborhood level.

According to CoreLogic, Rhode Island is “the most extreme example” ranking in the top 15 for both negative equity and for states with the highest share of 50% or more positive equity.

Similarly, although to a lesser degree, Massachusetts, New Jersey, Washington, D.C., and California exhibit similar trends.

Census data—which includes homeowners with negative equity—show the in 3Q10 the homeownership rate dropped to 66.9% from a peak of 69.2% in 4Q04. But if an alternative definition of homeownership is adjusted for severe negative equity of 25%—which can cause “strategic defaults” if the owners give up on their homes—brings the effective quarter homeownership rate to 62.4% “or 4.5 percentage points lower than the official rate,” there is a risk for these homes to go into foreclosure and further shrink the national homeownership rate.

It is known that in addition to driving foreclosures, negative equity reduces homeowner mobility and thus affects homeownership levels. Sales of nondistressed homes also affect home prices and negative equity at the local level.

Earlier this year CoreLogic, Santa Ana, Calif., reported that since the peak in home sales in 2005, nondistressed sales have dramatically declined indicating a clear relationship between the decline in nondistressed sales and the level of negative equity at the ZIP code and state level.

For example, CoreLogic noted that during the second quarter nondistressed property sale declines were much larger among properties with higher levels of negative equity, reducing homeowners’ ability to move.

State macroeconomic fundamentals are also reflected through nondistressed sales across most states with low or moderate levels of negative equity.

By the end of the third quarter, the aggregate level of negative equity declined to $744 billion, down 3% from 2Q10 and 7% from the end of 2009 when it stood at $800 billion.