Homeowner Equity Improves? A Mirage

Fewer homes had underwater mortgages in the third quarter.  The trend means little if anything to current homeowners and potential buyers.

“CoreLogic reports that 10.8 million, or 22.5 percent, of all residential properties with mortgages were in negative equity at the end of the third quarter of 2010, down from 11.0 million and 23 percent in the second quarter. This is due primarily to foreclosures of severely negative equity properties rather than an increase in home values.”

“During this year the number of borrowers in negative equity has declined by over 500,000 borrowers. An additional 2.4 million borrowers were near negative equity with less than five percent equity in the third quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide.”

The trend does not show anything that will cause sellers to re-enter the market. There is also nothing in the information which signals that it will be easier for people to sell their houses . A home sale almost always requires expenses in the form legal fees and closing costs. That means the owners of houses with only modest equity value may be forced to write a check to complete a sale.

The other hidden problem that makes the fact that mortgages are underwater academic is the issue of “shadow inventory.” These are houses which banks have foreclosed on but have not put on the market. They number in excess of 2 million. The eventual sales of these properties will be at sharp discounts.  This in turn will hurt the property values of most of the real estate around them.

Note: Negative equity remains concentrated in five states: Nevada, which had the highest negative equity percentage with 67 percent of all of its mortgaged properties underwater, followed by Arizona (49 percent), Florida (46 percent), Michigan (38 percent) and California (32 percent).

Douglas A. McIntyre