Ranks of underwater homeowners shrinking, boosting housing recovery

by Broderick Perkins

(9/14/2012) If home prices increase nationwide by 5 percent, 2 million more underwater homeowners would surface with some equity, according to a recent report.

That could mean more would list homes for sale and keep the short-inventory housing market from taking off again at unsustainable levels.

Right now, many underwater homeowners - who owe more than their home is worth - are keeping their homes off the market due to their unwillingness to sell at a loss.

That's putting a crimp in the housing recovery.

Limited homes for sale are generating somewhat of phantom recovery as demand-exceeding-supply conditions is ratcheting up prices, perhaps faster and more unsteadily then they would rise in a market with a more level playing field.

But that's changing, according to CoreLogic's Q2 2012 Negative Equity Report.

It analysis reveals 10.8 million homeowners, 22.3 percent of all mortgage properties, were underwater at the end of the second quarter. That's down from 11.4 million homeowners, or 23.7 percent, at the end of the first quarter of 2012.

Also, another 2.3 million borrowers were nearly underwater, with less than 5 percent equity in their home, at the end of the second quarter.

Both underwater and nearly underwater mortgages accounted for 27.0 percent of all mortgage residential properties in the second quarter, also down from 28.5 percent at the end of the first quarter in 2012.

Most underwater borrowers keep the faith, hoping for a day when they can again come up for air and benefit from appreciation-gained equity.

Nearly 84.9 percent of underwater homeowners were current on their payments at the end of the second quarter, up from about was 84.8 percent in the previous quarter.

"Surging home prices this spring and summer, lower levels of inventory, and declining REO sale shares are all contributing to the nascent housing recovery and declining negative equity," said Mark Fleming, chief economist for CoreLogic.

However, more homes for sale are paramount if the recovery is to build up a real head of steam. Sellers, however, see keeping homes off the market until they have sufficient equity as more important on a personal level.

Unfortunately, those motivated by job change, financial emergencies or other forced selling conditions, go to market. Others are staying put, paying down the mortgage and perhaps performing value-boosting home improvements.

"We currently expect home prices to continue to trend up in August. Were this trend to be sustained, we could see significant reductions in the number of borrowers in negative equity by next year," said Anand Nallathambi, president and CEO of CoreLogic.

The CoreLogic survey also found:

• Hard-hit Nevada was at the top of the heap with 59 percent of mortgaged properties underwater, followed by Florida (43 percent), Arizona (40 percent), Georgia (36 percent) and Michigan (33 percent).

• Of the total $689 billion in underwater mortgages, first lien loans without home equity loans accounted for $339 billion, while first liens with home equity loans accounted for $353 billion.

• Of the 10.8 million underwater borrowers, 6.6 million hold first liens without home equity loans. The average mortgage balance for this group of borrowers is $216,000, the average underwater amount is $51,000.

• Of the 4.2 million underwater borrowers possessing both first and second liens, the average mortgage balance is $300,000 and the average underwater amount is $84,000.

• The bulk of negative equity is concentrated in the low end of the housing market. For example, for low-to-mid value homes (less than $200,000), the negative equity share is 32 percent, almost twice the 17 percent for borrowers with home values greater than $200,000.