Negative Equity is Still Weighing Heavily on U.S. Housing Markets

There is no doubt that “underwater” mortgage holders represent a dwindling category of homeowners. But the waning negative equity crisis is still having adverse effects on recovering housing markets, reports Zillow.

The U.S. negative equity rate – the share of borrowers who owe more than the worth of their homes – fell to 13.4 percent in the third quarter, from 14.4 percent in second quarter. That’s down from 16.9 percent a year ago.
The national negative equity rate has fallen or stayed flat for 14 straight quarters after peaking in the first quarter of 2012 at 31.4 percent.
But this all means that there are still more than 6.5 million homeowners trapped in negative equity.
“And those millions of underwater homeowners – located to some extent in virtually every market nationwide – are weighing heavily on a housing market still struggling to get back to normal,” writes Zillow’s chief economist Svenja Gudell. “While negative equity directly only affects individual homeowners, it has a number of indirect impacts on local markets themselves.
Markets with high negative equity rates usually (but not always) share a few common traits, including:

  • Fewer homes for sale, especially lower-priced homes that are both more likely to be underwater, and more likely to be sought by first-time and entry-level homebuyers.
  • Counter-intuitively, homes that are for sale in markets where negative equity is more common tend to stay on the market longer.
  • Higher risk for elevated foreclosure rates, as deeply underwater homeowners may be more likely to default on their loan if they can no longer keep up with the payments or decide to walk away from what has become a bad investment.

Gudell states that listings “sell more quickly in markets with less negative equity, for a few likely reasons, but largely for one simple reason: The marketplace for buyers and sellers is more normal in places with lower negative equity.”
Many cities are still facing tight inventory, Gudell says, especially among entry-level homes.
“Those homes that are available are often not in demand and stay on the market for a long time,” Gudell writes. “This can be extremely frustrating for buyers and sellers alike, as they come face to face with the difficult side effects of negative equity. Unfortunately, those side effects look set to linger for many years to come.”

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