Underwater Homeowners Come Up for Air

Written by: Steve Cook   Tue, November 10, 2009 Beyond Today's News, Market Trends

The relentless upsurge in homeowners’ negative equity-mortgage debt that exceeds the value of their homes-halted and even slightly improved in the third quarter as home values stabilized in many markets and record foreclosures weeded out thousands of underwater owners.

The percentage of American single-family homes with mortgages in negative equity fell to 21 percent in the third quarter, down from 23 percent in the second, according to the third quarter Zillow Real Estate Market Report.
Year-over-year home values in the United States declined for the 11th consecutive quarter, falling 6.9 percent to a Zillow Home Value Index of $190,400. However, the rate of year-over-year decline shrank for the third quarter in a row, meaning home values did not decline as dramatically year-over-year in the third quarter as they did in the second or the first.

In addition, the Zillow Home Value Index remained relatively flat in the short term, declining 0.4 percent from the end of the second quarter to the end of the third quarter. The Zillow Home Value Index measures the value of all homes in an area, and the Q3 Zillow Real Estate Market Reports encompass 156 metropolitan statistical areas.

Foreclosure re-sales remained high, making up more than one-fifth (21.4 percent) of all U.S. home sales in September, and made up the majority of sales in several MSAs including the Merced, Calif. MSA (74.2 percent), the Stockton, Calif. MSA (69.3 percent), the Madera, Calif. MSA (68.7 percent), the El Centro, Calif. MSA (68.1 percent) and the Las Vegas MSA (67.5 percent). Additionally, 26.9 percent of home sales nationwide sold for less than what the seller originally paid.

“The decline in the percentage of homeowners with negative equity is a positive sign, and is directly attributable to the stabilization of home values from the second quarter to the third,” said Zillow Chief Economist Stan Humphries. “It is also attributable to many homeowners who were previously underwater on their mortgage losing their homes to foreclosure.

“The next several months will be critical to the housing market. Previously, we’d been expecting to see increasing foreclosure rates during the real estate market’s slow winter season, a confluence of events that would likely drive inventory up and prices down. But now, with the extension of the $8,000 first-time homebuyer tax credit and a new $6,500 credit for some repeat homebuyers, we could see a bump in demand that could partially offset the increased supply of foreclosed homes on the market. The credits are likely to bring continued stabilization in prices over this period, versus the price declines that we almost certainly would see otherwise. Whether this stabilization will be sustainable after the tax credits expire, however, is yet to be seen. Some of the demand that we are buying with tax credits we are also borrowing from the future, and will likely have to pay for later in the form of weaker-than-normal demand.”

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