Underwater Mortgages Belie Housing Recovery

Politicians and people in real estate are quick to report signs of a recovery in the struggling U.S. housing market, but a new report from CoreLogic shows all …

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Politicians and people in real estate are quick to report signs of a recovery in the struggling U.S. housing market, but a new report from CoreLogic shows all is not as it seems. The reports shows that 22.8% of all residential properties with a mortgage were underwater (when a property owner owes more than what the property is worth) at the end of 2011. Nevada experienced the worst of this with 61% of homeowners in negative equity, followed by Arizona and Florida, and experts say things could get worse as foreclosures increase and further drive down property values. For more on this continue reading the following article from TheStreet.

It’s a strange economic "recovery" when 22.8% of all residential properties with a mortgage — 11.1 million in all — were financially underwater at the end of last quarter. These startling findings come from a report by housing monitor CoreLogic, and are up from 10.7 million in the third quarter of 2011.

The continuing trend of foreclosures and declining home prices are to blame, but that doesn’t help homeowners or the housing market get back on top of their mortgage debt. CoreLogic reports that negative equity (when borrowers owe more on their mortgages than their homes are worth) in U.S. homes has regressed to levels last seen in the third quarter of 2009, at the height of the Great Recession.

Another 2.5 million mortgage holders were at what CoreLogic calls "near-negative equity," meaning those homeowners had less than 5% equity in their homes in the fourth quarter of 2011.

All told, underwater and near-underwater homeowners account for an alarming 27.8% of all U.S. home mortgages, with outstanding mortgage debt in negative equity home standing at $2.8 trillion.

"Due to the seasonal declines in home prices and slowing foreclosure pipeline which is depressing home prices, the negative equity share rose in late 2011," said Mark Fleming, chief economist with CoreLogic, in the report. "The negative equity share is back to the same level as Q3 2009, which is when we began reporting negative equity using this methodology. The high level of negative equity and the inability to pay is the ‘double trigger’ of default, and the reason we have such a significant foreclosure pipeline."

Fleming adds that the news could get worse, and that any slight, negative piece of economic news could fan the flames of negative home equity further and lead to a continued rise in foreclosures.

Statewise, Nevada had the highest negative equity rate, with 61% of homeowners underwater on their mortgages. Arizona, at 48%, and Florida, at 44%, ranked second and third in the CoreLogic ranking.

The survey also notes that it is low-end housing that’s suffering the most from negative equity, especially for homeowners who have taken out additional loans. For low- to midvalue homes priced at less than $200,000, 54% of homes with home equity loans are deemed underwater, compared with just 26% of homes without home equity loans.

The CoreLogic report is a disturbing one for the U.S. economy. For decades, Americans counted on the value of their homes to rise and used that financial leverage to take out loans, buy cars, pay for college, and build additions to their homes — all things that greatly aided the U.S. economy.

Now that so many U.S. homeowners own mortgages that cost more than the value of their homes, those free-spending days are over, and that’s not only bad news for the housing market and for homeowners, it’s bad news for the economy too.

CoreLogic didn’t elaborate on how long an "extended period" it would take for home prices to recover, but it’s finally starting to dawn on homeowners that meaningful recovery may not be measured in years, but rather in decades.

This article was republished with permission from TheStreet.

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