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Residential Department: DataDecoded: September 2014

 

DataDecoded

Negative home equity remains a deep hole

RealtyTrac’s most recent U.S. Home Equity & Underwater Report from this past second quarter shows that nearly 9.1 million U.S. home-owners are seriously underwater — 17 percent of all U.S. homeowners with a mortgage.

That’s down from 11.3 million seriously underwater homeowners, representing 26 percent of all homeowners with a mortgage a year ago in second-quarter 2013. This is a strong sign that rapidly rising home prices over the past two years have helped the U.S. housing market start pulling its way out of the negative-equity pit left behind by the boom-and-bust cycle of the past decade.

But that pulling up out of the negative equity pit has now stalled thanks to slowing home-price appreciation in many markets. From this past first quarter to this past second quarter, the percentage of homeowners seriously underwater decreased, but just barely, from 17.4 percent to 17.2 percent.

Price Appreciation in Markets with Most Underwater Homes

Nationally, home-price appreciation increased a healthy 13 percent on a year-over-year basis this past May, up from a 5 percent increase the year before. But in some of the markets with the most negative-equity exposure, the rate of appreciation is falling.

In Florida, which had the most seriously underwater homeowners at 1.7 million, home prices showed a year-over-year increase of 11 percent this past May, but that was down from as high as 17 percent annual appreciation in 2013. In California, where more than 1 million homeowners are seriously underwater, annual home-price appreciation is down to 16 percent this year compared to as high as 31 percent in 2013. Similar patterns have played out in Michigan and Arizona, where annual home-price appreciation is down to single digits this year after going as high as 24 percent in 2013.

For those homeowners with negative equity, the light at the top of the hole still looks dismally distant. Not only is home-price appreciation — their escalator out of negative equity — slowing, but most negative-equity homeowners are near the bottom of that escalator.

RealtyTrac data shows that the average loan to value (LTV) of homeowners seriously underwater — defined as those with at least 25 percent negative equity — is a startling 187 percent, meaning that on average the outstanding loans on those properties are 87 percent higher than those properties’ estimated market values.

"From this past first quarter to this past second quarter, the percentage of homeowners seriously underwater decreased, but just barely, from 17.4 percent to 17.2 percent."

It’s going to take more than just a few months or even years to recover that 87 percent — particularly at the 6 percent to 10 percent appreciation per year that most markets seem to be settling into. Of course, the worst-case scenario is that home-price appreciation drops even lower or even goes negative, in which case we’ll be seeing the negative-equity hole getting deeper rather than shallower.

Some of the highest average LTVs of homeowners seriously underwater were in Louisiana (246 percent), Arkansas (220 percent), Oklahoma (216 percent), the District of Columbia (211 percent) and Hawaii (208 percent). Other states with average LTVs of seriously underwater homeowners above the national average were Colorado (200 percent), Michigan (199 percent), Georgia (197 percent), Wisconsin (197 percent) and New York (196 percent).

In markets like Michigan, there is a problematic combination of a high percentage of seriously underwater homes (27 percent in the top five states nationwide) along with an above-average LTV for those homes that are seriously underwater (199 percent). Other states in the top six for percentage of seriously underwater homeowners where the average LTV is also above the national average are Florida, Illinois and Ohio. These states have the most risk of homeowners strategically defaulting over the next few years as they see little chance of regaining their equity.


 

Daren Blomquist is vice president of market economics at Auction.com. In this role, Blomquist analyzes and forecasts complex macroeconomic and microeconomic data trends to provide value to both buyers and sellers using the platform. Blomquist has been cited by thousands of media outlets nationwide, including major news networks, The Wall Street Journal, The New York Times and USA Today. Prior to Auction.com, Blomquist worked at Attom Data Solutions.

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