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I’m Fine, It’s My House That’s Drowning.

Can you throw one to my house?

First American Core Logic just released their Fourth Quarter 2009 Negative Equity Data Report last week. Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgage than their homes are worth. The reason this report is so important is that studies have shown that there is a direct correlation between a home losing equity and its chances of winding up a distressed property (foreclosure or short sale).The report itself states:

Negative equity is a significant drag on both the housing market and on economic growth. It is driving foreclosures and decreasing mobility for millions of homeowners.

Why does negative equity lead to foreclosures?

Simply explained, once borrowers see their house fall into the situation where the mortgage is higher than the value of the home, they think differently about paying said mortgage. From the report:

The rise in negative equity is closely tied to increases in pre?foreclosure activity and is a major factor in changing homeowners’ default behavior.

Below is a graph showing that as the home continues to lose equity the percentage of pre-foreclosure activity raises dramatically.

If you live in an area that has lost equity, there is a growing concern that near-by homeowners will make the decision not to pay the mortgage. That will lead to an increase in distressed properties in the neighborhood.

Will that be a problem where I live?

Below is a graph of the negative equity numbers by state. Any percentage of homes in that category will present a challenge. The states with the largest percentages will have the biggest problems.

The red line is the national average. Any state to the left of it has a very serious challenge.

What does this mean to you?

An increase of inventory to the market will have an effect on values in that market. An increase in distressed inventory that will be at a discounted price will have a dramatic impact on prices. If you are thinking of selling in the near future, you should be aware of how this might impact your neighborhood.

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