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Today, Erik Cavarra examines the Negative Equity Rate: We are not out of the water yet, and the evidence of that is that 10.8m homeowners still have properties under water.
The national negative equity rate fell at its fastest pace ever in the third quarter, dropping to 21 percent of all homeowners with a mortgage, according to the third quarter Zillow Negative Equity Report.
Roughly 10.8 million American homeowners remain underwater, owing more on their home than it is worth, down more than 4.9 million from the peak in the first quarter of 2012.
In the second quarter, the national negative equity rate was 23.8 percent. The decline represents the largest quarter-over-quarter drop since Zillow began tracking negative equity in the second quarter of 2011. Approximately 1.4 million homeowners were freed in the third quarter from the second quarter, also a high. Roughly one-third of homes are owned without a mortgage. The negative equity rate among all homeowners, both with and without a mortgage, was 14.7 percent at the end of the third quarter, down from 16.7 percent in the second quarter.
In Denver, 11.9 percent of homeowners with mortgages had negative equity in the third quarter. Compare that to 32.5 percent, which was the figure in the second quarter of 2011. Since that quarter in 2011, when the negative equity rate was at its worst, 108,449 Denver homeowners have been freed from negative equity.
Negative equity down, but not out
But despite the improvements, more than one in five American homeowners with a mortgage remains underwater, a stubbornly high rate that is contributing to inventory shortages and holding back a full market recovery. The “effective” negative equity rate, which includes those homeowners with a mortgage with 20 percent or less equity in their homes, was 39.2 percent in the third quarter. Listing a home for sale and buying a new one generally requires equity of 20 percent or more to comfortably meet related expenses.
With the pace of home value appreciation slowing, the pace of negative equity improvement will also slow. The negative equity rate is expected to fall to 18.8 percent by the third quarter of 2014, according to the Zillow Negative Equity Forecastiii. And more than half of homeowners with negative equity (55.6 percent) are 20 percent or more underwater. According to the most recent Zillow Home Value Forecastiv, home values are expected to rise 3.8 percent in the next year. Assuming appreciation at that rate going forward, it would take a homeowner underwater by 20 percent roughly five years to reach positive equity.
“Rising home prices and a greater willingness among lenders to engage in short sales have both contributed substantially to the significant decline in negative equity this quarter. We should feel good that we’re moving in the right direction and at a fast clip,” said Zillow Chief Economist Dr. Stan Humphries. “But negative equity will remain a factor for years to come, and must be considered part of the new normal in the housing market. Short sales will remain a persistent feature of the market as many homeowners remain too far underwater for reasonable price appreciation alone to help.”
Large metros with the highest negative equity rate in the third quarter were Las Vegas (39.6 percent), Atlanta (38.2 percent) and Orlando (34.2 percent). Among the 30 largest metro areas covered by Zillow, those with the greatest decline in the number of underwater homeowners since their peak include San Jose (-66.4 percent from peak), Denver (-63.3 percent from peak) and San Francisco (-59.6 percent from peak).
These results are from the third quarter edition of the Zillow Negative Equity Report, which looks at current outstanding loan amounts for individual owner-occupied homes and compares them to those homes’ current estimated values. Loan data is provided by TransUnion®, a global leader in credit and information management. This is the only report that uses current outstanding loan balances on all mortgages when calculating negative equity. Other reports estimate current outstanding loan balance based on the most recent loan on a property (i.e., the original loan amount at time of purchase or refinance).
In owner-occupied housing market, a fall in the market value of a mortgaged house or condo is the usual cause of negative equity. Negative equity in the owner-occupied market sometimes occurs when the owner obtains second-mortgage home-equity loans, causing the combined loans to exceed the home value. If the borrower defaults, repossession and sale of the property by the lender will not raise enough cash to repay the amount outstanding, and the borrower will both have lost the property and still be in debt. Some states like California require lenders to choose between going after the borrower or taking repossession, but not both.
The term negative equity was widely used in the United Kingdom during the economic recession between 1991 and 1996, and in Hong Kong between 1998 and 2003. These recessions led to increased unemployment and a decline in property prices, which in turn led to an increase in repossessions by banks and building societies of properties worth less than the outstanding debt.
It is also common for negative equity to occur when the value of a property drops shortly after its purchase. This occurs regularly in automobile loans, where the market value of a car might drop 20-30% as soon as the car is driven off the lot.
While typically a result of fluctuating asset prices, negative equity can occur when the value of the asset stays fixed and the loan balance increases because loan payments are less than the interest, a situation known as negative amortization. The typical assets securing such loans are real property – commercial, office and residential. When the loan is nonrecourse, the lender can only look to the security, that is, the real property when the borrower fails to repay the loan.
Since 2007, those most exposed to negative equity are borrowers who obtained high value mortgages that were commonplace before the credit crunch, as they are most at risk from declines in property price.
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