The reductions in the number of homes with underwater
mortgages have been encouraging, with reductions in negative equity, each of
the last seven quarters. However, effective negative equity has remained high. While
underwater mortgages have dropped to below 20%, as of the fourth quarter of
2013, according to Zillow research, the effective negative equity remains at
37.6%.
What is Effective
Negative Equity?
Effective negative equity includes all homes where the
mortgages are higher than 80% of the value of the home. This has been deemed
effective negative equity because, while the homeowner does not owe more than
the home is worth, they are effectively still underwater. They do not have
enough equity to pay for the costs associated with selling a home and still
have a down payment for the next home.
The impact of effective negative equity is significant in
the slow recovery of the real estate markets because consumers are not able to
sell their homes and remain homeowners with the purchase of another home. This
reduces inventory and impacts homeowners who sell they homes and then must become
renters.
The Impact of
Effective Negative Equity
In the years leading up to the real estate market crash in
2008, millions of homeowners were purchasing homes with minimal or no down payments.
Today lenders are not as anxious to lend, and have stricter guidelines for
lending. This is partly due to additional regulation and oversight along with
the high level of losses incurred by banks and lenders. The result is that homeowners
are now required to come up with larger down payments. Gone are the days of
buying a home with no money down. This
makes the effective negative equity numbers more problematic.
With millions of Americans finding themselves or someone
they know in these circumstances, the impact has also created an image problem
with regard to home ownership as a whole. There was a time when families would
scrape together a down payment at any cost, because it was understood that the
home would appreciate and the home would build wealth.
When consumers are confident that a home is an investment,
home buyers are plentiful. Today that level of confidence has been degraded
through several years of declining values and watching friends and neighbors
lose their homes to foreclosure, short sales and the inability to sell, due to
negative equity.
Increasing home values are helping the real estate market
along, but progress is slow. Lower down payments, as with FHA loans, are providing
opportunities for buyers to purchase homes with a minimum of 3.5% down instead
of 20%. Lenders loosening up requirements will provide opportunities for more
buyers to have access to home ownership. As the market improves, buyer
confidence will also create more demand.
Some of the hardest hit states like Florida, California and
Arizona have seen sharp spikes in values because the effective negative equity
has created a housing shortage. It is anticipated, according to Zillow
forecasting models, that it will be several more years before the real estate
market will fall within normal statistical ranges. Until that time, working
with homeowners to meet their buying and selling needs will continue to
challenge real estate professionals nationwide.
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