By Mark Huffman
ConsumerAffairs.com
November 24, 2009
If you owe more on your mortgage than your home is worth, you're in good company. An amazing 23 percent of mortgaged property in the U.S. was "under water" at the end of the third quarter, according to real estate tracking firm First American Corelogic.
Negative equity is not only bad news for the individual homeowner - essentially meaning they can't sell their property - but it's a worrisome problem for the overall housing market. Homeowners with negative equity are much more likely to default on their loans and simply walk away, creating more foreclosures.
Defaults and foreclosures put downward pressure on home prices. As home prices fall, more homeowners find themselves "under water," creating a devastating cycle.
First American CoreLogic says most of the homeowners in a negative equity situation purchased their homes between 2005 and 2008, comprising the peak of the housing market. Not only did they pay inflated prices for their homes, many took advantage of "creative" financing that required little or no money down. As a result, they owed their lender more than they could reasonably sell their house for when prices began to fall.
According to First American CoreLogic, 40 percent of homeowners who purchased their home in 2006 are in a negative equity situation. Of perhaps more concern is the fact that 11 percent of those who bought a home this year are already "under water."
A large percentage of foreclosures have been caused by homeowners losing their income, or loan rates resetting so that monthly payments increased dramatically. These homeowners default because they can no longer afford to make the payments.
But in most cases, negative equity homeowners are still employed and can still make the payments. Though they are unlikely to walk away from their homes simply because they are underwater, housing analysts consider them extremely vulnerable. Unable to sell their homes, default is about their only option if they lose their income.
Homeowners in markets where prices have fallen the most are in most danger of being "under water." The First American Corelogic report shows 65 percent of homeowners in Nevada are in a negative equity situation.
