Negative Equity Falls In 2nd Quarter
The housing market is finally showing signs of life, with many metropolitan areas having hit the elusive bottom and seeing home value appreciation; however,despite improvements negative equity remains prevalent. According to the Q2 2012Negative Equity Report, 30.9% of home owners (15.3 million households) with a mortgage are underwater.
Recent home value appreciation in many markets across the US has pushed negative equity levels down from 31.4% in the previous quarter. However, negative equity is still slightly elevated from the Q2 2011 level of 30 percent. In total, underwater homeowners owe $1.15 trillion more than their homes’ worth. Over 40 percent ofunderwater homeowners (12.5% of homeowners with a mortgage), owe between 1% and 20% more than their home is worth.
On the other end of the spectrum, about 2.2 million underwater homeowners (4.5% of homeowners with a mortgage) owe more than double what their home is worth. On average, homeowners with negative equity owe $75,235 more than what their house is worth, or 43.9% than its current value. While roughly one out of every three homeowners with mortgages is underwater, the good news it theat 90.8% percent of these are current on their mortgage payments.
Deeper analysis of the data has revealedthat negative equity hasdisproportionately affectedborrowers under age 40.Nearly half (48%) of homeowners with mortgages under the age of 40 are underwater. To calculate negative equity, the estimated value of a home is matched to all outstanding mortgage debt and lines of credit associated with the home, including home equity lines of credit and home equity loans.
The extent to which U.S. homeowners are underwater varies greatly by region. High rates of negative equity have accumulated in hard hit states such as California, Florida, Nevada, Arizona, and where home values have fallen dramatically from their peak. In 36 out of 787metro statistical areas, more than half of all homes with mortgages are underwater. Among these are larger metros such as Las Vegas (68.5%), Atlanta (54.4%), Orlando (51.9%), Phoenix (51.6%), and Los Angeles (51.2%).
While negative equity makes a household more vulnerable to foreclosure, most homeowners in negative equity will not end up in default. The majority of underwater homeowners continue to make regular payments on their mortgage, with only 9.2% of underwater homeowners being delinquent. This implies that 2.9% of all homeowners with a mortgage are at high risk for foreclosure in the near-term.
In terms of historical performance, we saw negative equity significantly decrease in some metropolitan areas while it continued to increase in others. These movements are highly correlated with home value movements. As home values have been aggressively risingin certain areas, negative equity has continued to recede.
With unemployment remaining flat or even rising in some parts of thecountry, negative equity remains a major factor in the housing market as the combination of negative equity and elevated unemployment spawns fresh foreclosures. With evidence of foreclosure starts increasing in parts of the country, even while foreclosureliquidations continue to decline, we do expect this dynamic to put downward pressure on the negative equity rate.
As a result homes withnegative equity continue to be foreclosed, sold in short sales, or have their principals reduced in a modification process. Downward pressure on negative equity from ongoing foreclosures processes will be amplified by modest increases in home values over the coming few years.