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CoreLogic U.S. Economic Outlook- October 2015

Homeowners' Equity: Turning a Negative into a Positive

Frank Nothaft    |    Mortgage Performance, Videos


Owners with Negative Equity Falls by 1 Million Over Last Year

Another sign of the housing market’s recovery has been the drop in the number of homeowners with negative home equity over the past year. As of mid-2015, 4.4 million homeowners had a mortgage loan balance that exceeded their home’s value, in other words, they were ‘underwater’. While that’s still a large number of homeowners, it’s far below the 12 million we measured in 2010 and 2011 during the trough of the housing cycle.

And at that trough more than one quarter of all owners with a mortgage were underwater. Today, that figure is 8.7 percent, or about 1-in-12 owners: Still too high, but a large and continuing improvement.

There are several reasons for the dramatic decline in underwater owners. First, our nation’s housing market has had the largest number of completed foreclosures since the 1930s. And while foreclosures need not be on homes with underwater owners, the significant majority has been. Over the 12 months ending June 2015 there were more than 500,000 completed foreclosures.

A second contributor to the declining number of underwater owners is short sales: a home that sells for less than the seller’s mortgage balance. At CoreLogic we found nearly 200,000 short sales have occurred during the year through June. Together, short sales and completed foreclosures totaled 700,000 over the year ending June, and more than 6 million during the last six years.

A third important factor has been home-price appreciation. The drop in prices between 2006 and 2010 was the single biggest contributor to the jump in homeowners with negative equity, and now that home prices have recovered significantly, is an important factor in its reduction. Between June 2011 and June 2015, the CoreLogic national Home Price Index was up 31 percent; the rise in home values has helped to lift many owners up from being underwater.

Based on the current distribution of underwater homeowners, about 800,000 have up to 5 percent negative equity. Thus, a 5 percent increase in home values in the next year, if experienced equally across all homes, would enable these owners to become right-side up once again.

There are other reasons for the decline in negative equity, as well. Some lenders have offered principal forgiveness for owners who are deeply underwater. And for owners very close to parity between their loan balance and property value, amortization or partial loan prepayment may restore housing equity.

Over the next year, we expect continuing value appreciation to be an important source for further reductions in homeowners with negative equity, and for other owners to build home equity. For most moderate- and lower-income owners, home equity is the main component of their household wealth, and home-value gains are beginning to turn it into a positive asset once again.

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