Nearly Ten Million Homeowners Still Lack the Equity to Sell or Buy

Almost 273,000 U.S. homes returned to positive equity in the third quarter of 2014, bringing the total number of mortgaged residential properties with equity to approximately 44.6 million, or 90 percent of all mortgaged properties, according to the latest report from CoreLogic.

Borrower equity increased year over year by approximately $800 billion in Q3 2014. The CoreLogic analysis indicates that approximately 5.1 million homes, or 10.3 percent of all residential properties with a mortgage, were still in negative equity as of Q3 2014 compared to 5.4 million homes, or 10.9 percent, for Q2 2014.

This compares to a negative equity share of 13.3 percent, or 6.5 million homes, in Q3 2013, representing a year-over-year decrease in the number of homes underwater by almost 1.5 million (1,433,296), or 3.0 percent.

“Nationally, the negative equity share is down over three percentage points over the past year. Declines were concentrated in a handful of states, such as Nevada, Georgia, Michigan and Florida,” said Sam Khater, deputy chief economist for CoreLogic. “Forecasted house price appreciation of about five percent over the next year suggests that negative equity should be at about 8 percent a year from now, still above average, but approaching the pre-crisis level.”

Nineteen Percent are still Under Equitied

Of the 44.6 million residential properties with positive equity, approximately 9.4 million, or 19 percent, have less than 20-percent equity (referred to as “under-equitied”) and 1.3 million of those have less than 5-percent equity (referred to as near-negative equity). Borrowers who are “under-equitied” may have a more difficult time refinancing their existing homes or obtaining new financing to sell and buy another home due to underwriting constraints. Borrowers with near-negative equity are considered at risk of moving into negative equity if home prices fall.

In contrast, if home prices rose by as little as 5 percent, an additional 1 million homeowners now in negative equity would regain equity.

“Negative equity continued to decrease in the third quarter as did the level of homes mired in the foreclosure process. This should hopefully translate into less friction in the housing market as we move forward,” said Anand Nallathambi, president and CEO of CoreLogic. “Better fundamentals supporting homeownership in the face of higher rents should attract more first-time homebuyers to the market this year and next.”

Return to Peak Values has Stalled

Meanwhile Homes.com®reported that the nimbler of rebounding markets plateaued in October. A total of 110 markets have now fully recovered their peak prices, restoring hundreds of millions of dollars of lost homeowner equity, slowing demand contributed to moderating price increases during the summer and fall months.  Inventory increased as new product was made available in many markets. With winter approaching, typically a slow time for real estate sales, more markets many slip below the fully recovered level.

The monthly rate of change in the price index has slowed over the past three quarters, potentially lengthening the time for additional markets to reach a full rebound in the coming months.  In October, the average rebound percentage of all 300 markets affected by the Great Recession was 95.29 percent, which is only 4 percent higher than the average of 91.73 percent posted on October of 2013 and 2.7 percent higher than the January 2014 average of 92.82 percent.

Those markets that lost more than others during the housing recession will have greater difficulty reaching full price recovery. Of 38 markets among the top 100 with severe price declines that lost over 20 percent of value, only two have rebounded.  By contrast, all of the 25 markets that had minimal price declines, fewer than 10 percent now are fully rebounded. Of the 37 markets with moderate price declines of 10 to 20 percent, 17 have not reached statistically reached rebound status. They range in rebound percentage from a low of 88 percent to a high of 97 percent and are located primarily in the Northeast and Midwest.

“Before moderating price increases have temporarily halted more than 18 months of steady progress towards full price recovery in October, more than one third of America’s real estate markets fully rebounded.  Millions of owners have seen their equity in their homes restored after it was lost in the housing collapse,” said David Mele, president of Homes.com.

Further Progress will be more Difficult

“In the months to come, achieving the extraordinary rate of recovery we have enjoyed to date will be increasingly difficult as markets that suffered moderate and severe losses struggle to return to their peak prices.  With the spring sales season, we hope the march to full recovery resumes in every market that suffered in the Great Recession,” Mele said.

The flattening of price increases was widespread and reduced the number of large markets reporting gains.  In October the 13.4percent fewer markets gained value than in September.  Some 58 of the top 100 markets posting month-over-month gains based on a 3-month moving average basis, which is down 9 markets from last month and 18 markets from August said the Homes.com report.

Five states together account for 33.1 percent of negative equity in the United States, according CoreLogic. Nevada had the highest percentage of mortgaged properties in negative equity at 25.4 percent, followed by Florida (23.8 percent), Arizona (19 percent), Rhode Island (14.8 percent) and Illinois (14.1 percent). These top

Texas had the highest percentage of mortgaged residential properties in an equity position at 97.4 percent, followed Alaska (97.1 percent), Montana (97.1 percent), Hawaii (96.4 percent) and North Dakota (96.1 percent).

Of the 25 largest Core Based Statistical Areas (CBSAs) based on population, Tampa-St. Petersburg-Clearwater, Fla., had the highest percentage of mortgaged properties in negative equity at 25.5 percent, followed by Phoenix-Mesa-Scottsdale, Ariz. (19.3 percent), Chicago-Naperville-Arlington Heights, Ill. (16.3 percent), Riverside-San Bernardino-Ontario, Calif. (15 percent) and Atlanta-Sandy Springs-Roswell, Ga. (14 percent).

Of the same largest 25 CBSAs, Houston-The Woodlands-Sugar Land