Pool of ‘Upside Down’ Homeowners Is Shrinking

Photo credit: Southernstatesinsurance.com

Photo credit: Southernstatesinsurance.com

Gino Blefari
Senior Vice President of HSF Affiliates
HomeServices of America, Inc

“Upside down” homeowners – or those who owe more on their mortgage than their home is worth in current market conditions – was a largely followed housing segment during the downturn and recession. Many markets and individual owners are still feeling the effects.

How deep is the problem now? Are we near more complete relief that puts more balance back into the market?

Real estate data firm CoreLogic last week released a reportshowing that about 312,000 residential homes regained equity in the first quarter of 2014. This raises the total of residential properties with equity to more than 43 million.

That leaves about 6.3 million homes – or 12.7% – with negative equity (i.e., owing more on the mortgage than the home is worth), an improvement from 6.6 million, or 13.4% in the fourth quarter of 2013.

The report went on to show that of the 43 million homes with equity, about 10 million have less than 20% equity. This is considered a risky situation for homeowners should home prices drop.

What does this mean for the market overall?

The improvement is good news for sure. For the owners with negative equity, it essentially means they either cannot sell or would have to show a hardship for short sale or even foreclose. But it’s important to note that as long as a seller is not looking to move and can afford the mortgage, there’s really no issue.

The owners with negative or short equity who need to sell or want to sell in the coming year or two will need home prices to rise to cover the value of their existing mortgage. While that may seem feasible in some markets where prices are right back at pre-recession levels, it may not in those markets that are still sluggishly pulling out of the downturn.

States with the highest percentage of negative equity homes include: Nevada (29.4%), Florida (26.9%), Mississippi (20.1%), Arizona (20.1%), and Illinois (19.7%).

CoreLogic expects another 5% increase in home prices over the next year, which would lift another 1.2 million properties out of negative equity.

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