Logjam at the low end of the housing market is caused by negative equity that is too deep

by | Jun 15, 2015 | Article, Market & Trends

While the U.S. negative equity rate is dropping,  more than four million homeowners still owe the bank at least 20 percent more than their homes were worth, according to a release of the latest report from Zillow real estate research.

Stan Humphries, chief economist for Zillow, says more low-end homes will come on the market in 2015.

Stan Humphries, Zillow chief economist.

“It’s great news that the level of negative equity is falling, but what really worries me is the depth of negative equity. Millions of Americans are so far underwater, it’s likely they may not re-gain equity for up to a decade or more at these rates,” Zillow Chief Economist Dr. Stan Humphries said in the release.

That means those homes would have to appreciate at least 20 percent for their owners to have any chance of breaking even on a sale. Home values are forecast to continue rising, but at a slower pace than recent years.

The national negative equity rate dropped to 15.4 percent in the first quarter. A year ago, the rate was 18.8 percent. The rate of negative equity improved in all of the 35 largest housing markets in the first quarter of 2015, a sign that, metro-by-metro and home-by-home, the country is continuing to recover from the lax lending rules and subsequent housing market bust of the last decade.

At the peak of the real estate crisis, more than 15 million homeowners owed more on their mortgages than their homes were worth, putting them in negative equity. Foreclosures, short sales and rapidly rising home values freed nearly half of those homeowners, leaving 7.9 million homeowners upside down at the end of the first quarter of 2015. Homeowners who remain underwater will likely be the toughest to free from negative equity.

There is high demand for homes in the bottom third of the market during the spring and summer selling seasons. However, a disproportionate number of those homeowners are simply stuck in their homes and can’t afford to sell to buyers looking for homes in their price range.

The rate of underwater homeowners was much higher among the homes with the least value. More than 25 percent of those who own the least valuable third of homes were upside down, compared to about 8 percent of the most valuable third of homes.

The imbalance was even more pronounced in some markets.

  • In Atlanta, for example, 46 percent of low-end homeowners were underwater, compared with 10 percent of high-end homeowners.
  • In Baltimore, 32 percent of low-end homeowners were in negative equity, compared to 9 percent of those who own the highest-value homes.

“And because negative equity is concentrated so heavily at the lower end, it throws a real wrench in the traditional housing market conveyor belt,” Humphries said in the release.  Potential first-time buyers have difficulty finding affordable homes for sale because those homes are stuck in negative equity. And owners of those homes can’t move up the chain because they’re stuck underwater in the entry-level home they bought years ago. The logjam at the bottom is having ripple effects throughout the market, and as home value growth slows, it will be years before it gets cleared up. In the meantime, we’ll be left with volatile prices, limited inventory, tepid demand, elevated foreclosures and a whole lot of frustration.”

Among the 35 largest housing markets, Las Vegas, Chicago and Atlanta had the highest rates of homeowners in negative equity. A smaller share of homeowners were upside down in Miami and Detroit, but homeowners there were more deeply underwater. In both places, over 60 percent of homeowners in negative equity were more than 20 percent underwater.

negative equity homeowners face in this markets where this is a logjam at the low end of the housing market


















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