Negative Equity Persistent Problem in US

Zillow’s latest Negative Equity Report indicates there are still scores of people who are underwater in their homes, meaning that they owe more on their homes than what …

Zillow’s latest Negative Equity Report indicates there are still scores of people who are underwater in their homes, meaning that they owe more on their homes than what they are worth. The problem with negative equity is that it foreshadows probable loan default, keeps people trapped in bad investments and disrupts the flow of supply and demand by discouraging buyers and bringing down values of otherwise healthy communities. Zillow’s report may show that negative equity stats are dropping, but analysts emphasize the insidious nature of the problem and argue states like Florida are exposed to serious danger due to the high rates of negative equity focused there. For more on this continue reading the following article from JDSupra.

This week, Zillow released its latest Zillow Negative Equity Report and it’s creating lots of chatter around the country.  You can read the Zillow Negative Equity Report here.

The Wall Street Journal points out that negative equity has fallen from last year’s 32.4% according to Zillow’s statistics and Zillow has changed its data going back five quarters as part of a new way of doing things.   Given these considerations as well as CoreLogic’s negative equity studies (which aren’t as high as this one by Zillow), maybe we should review Zillow’s new work with a careful eye. 

Why the concern over these negative equity numbers?  Zillow explains:

While the percent of homes in negative equity is dauntingly high, this percentage only represents a potential danger. The majority of underwater homeowners continue to make regular payments on their mortgage, with only 10.1 percent of the 31.4 percent nationwide being delinquent. Therefore, 3.1 percent of homeowners in the nation are at high risk for foreclosure near-term although there has been an increased utilization by lenders of foreclosure alternatives such as short-sales. In the Las Vegas metro, only 5 percent of homeowners are at high risk of foreclosure in the near term, despite 71 percent of homeowners being underwater….

Florida Has Lots of Negative Equity Concerns According to Zillow

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From an interactive visual at the Zillow site, you can input city names or zip codes and finding negative equity information.  For example, in the Miami area:

  • zip code 33168 in Miami has 58% of its homes underwater and is in the top 5% in the United States for areas with negative equity;
  • zip code 33177 in Miami has 57% of its homes underwater and is also in the top 5% in the nation for amount of homes underwater; and
  • zip code 33190 in Miami has 71% of its homes underwater and is in the top 1% in the country for amount of homes underwater. 

As for how this report is compiled, according to Zillow, they take their mortgage data from TransUnion and then analyze the numbers to find information on negative equity and delinquencies across the country as well as trends in loan-to-value ratios. 

Zillow determines "negative equity" for the purposes of its report as taking the estimated fair market value of the home and then deducting debt against it, e.g. mortgage debt on the property and any equity loans or lines of credit.

The Dangers of Florida’s Negative Equity Have To Be Solved. Soon.

These negative equity numbers shouldn’t make anyone stop in their tracks like a deer in the headlights.  That’s the worst thing any investor or builder should do.  However, it is important to recognize the legitimate concerns this report raises, such as:

  • Negative equity is a hint of possible default on mortgages that many home owners are paying now, and are current in those payments. 
  • Negative equity keeps people in homes that are underwater – they cannot sell them, they cannot move to better jobs, they cannot refinance the note, etc.  They are stuck.
  • Negative equity discourages potential buyers from buying a home in a community with negative equity properties – buyers will be skittish to buy a home that may be losing value in the future.
  • Negative equity poisons the real estate market’s balance of supply and demand.  Existing homes and future home developments are impacted detrimentally by negative equity in a community.

Bottom line, negative equity is a huge economic problem and the Zillow report should be turning lots of heads.  It reflects a problem in the national real estate market as a whole, as well as within the banking industry, which keeps things from working as they should. 

Until massive residential home negative equity is resolved, our Florida economy cannot fully recover.  It’s that big of a deal. 

This article was republished with permission from JDSupra.


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