Underwater Homes Suggest Weak Recovery

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NEW YORK (MainStreet) – Everyone who follows the housing market has become familiar with the term “negative equity,” a frightening situation for a homeowner: owing more on the mortgage than the property is worth. Sadly, that situation is getting worse and reaching shocking levels in some formerly hot markets.

Nationwide, the negative equity rate (the proportion of mortgage owners owing more than the value of their home) rose to 27% in the fourth quarter of 2010, up from 23.2% in the third quarter, according to Zillow.com, the housing data firm.

“The accelerated decline in home values brought trouble for home sellers, as more were forced to sell their home for less than they purchased it,” Zillow said. “The rate of homes selling for a loss reached a new peak in December, with more than one-third selling for a loss. The rate of homes sold for a loss has increased steadily for the past six months.”

As bad as the national number sounds, things are even worse in many of the largest 25 markets Zillow covers. In Phoenix, the underwater rate is 69.9%. In Orlando, Fla. it’s 61.7%. In Riverside, Calif., it’s 50.1% and in Sacramento, Calif., 46.8%.

Zillow’s report does offer some good, or slightly better news at least: In a few markets the negative equity rate is lower than the national average. In Pittsburgh it’s just 9.3%, while it’s 13.9% in Boston and 15% in New York City. But that certainly doesn’t mean those markets are healthy, as prices fell in all of them. In fact, prices fell in all 25 markets in the fourth quarter, by an average of 2.6%. They were down 5.9% for the year.

The negative equity rates were boosted by the slowdown in foreclosures due to the “robo-signing” paperwork issues raised last year. Since many properties in foreclosure are underwater, a slowdown in completing the foreclosure process adds to the negative equity figures, Zillow says.

Unfortunately, another factor in rising negative equity was “accelerating home value declines,” Zillow said. The end of the home buyer tax credit in the middle of 2010 removed a prop from the market, contributing to the drop in prices.

“Foreclosures are expected to increase again in early 2011, which may cause negative equity to fall as some underwater homeowners lose their homes to foreclosure and are no longer in negative equity,” Zillow said.

That’s not really good news for homeowners, as the foreclosed homes are likely to be sold at fire-sale prices, undermining prices of all homes.

“Home value trends in the fourth quarter remained grim, but the good news is that these declines, while painful in the short-term, mean we're getting closer to the bottom,” said Zillow chief economist Stan Humphries.

“The housing recession is likely in its death throes, and we expect to see sales pick up in early 2011. That will lead the way to home values stabilizing and an eventual bottom later this year, although it will take several months of increased sales activity before values begin to respond,” Humphries added.

Buyers and sellers can draw the same lesson from the figures, which is to wait. Buyers may get better prices in a few months; sellers may get better ones in a year or so.

Still, nothing’s guaranteed. For now, it probably makes sense to check out your local market. Once the graph shows that prices are leveling off, the bottom may have been reached. But beware of drawing that conclusion too soon. Some markets, like Seattle, seemed to be holding up fine only to fall into a delayed slump.

—For the best rates on loans, bank accounts and credit cards, enter your ZIP code at BankingMyWay.com.

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