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Houses Underwater: The Tide Is About to Rise

Two separate housing reports came out in the last week which discussed different challenges facing the current real estate market. The first was CoreLogic’s Negative Equity Report and the second was JP Morgan Chase’s Home Price Monitor. Each report delivered some difficult news. However, if you piece both reports together, we can see future challenges are in store for home values.

Negative Equity

When a home’s current value is less than the existing mortgage on that home, the house is said to be in a ‘negative equity’ situation (other terms used to describe this situation are ‘underwater’ and ‘upside down’).  The CoreLogic report stated:

“…that 10.9 million, or 22.5 percent, of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2011… An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the second quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide.”

This is important because studies show that people in a negative equity situation are more likely to default on their mortgage payments than people who have equity in their homes.

Home Prices

Many experts believe that housing prices will soften through this winter. According to an article in HousingWire, analysts from JP Morgan Chase announced in their recent Home Price Monitor:

“Home prices could dip another 6% to 7%, before hitting rock bottom in early 2012.”

Let’s Combine the Information

The CoreLogic report said there are an additional 2.4 million households with less than 5% equity. The JP Morgan Chase report said that prices will drop another 6 to 7% in the next six months. That leaves an additional 2 million+ homes in the near future that will be faced with the decision to pay (or not pay) the mortgage payment on a house no longer worth the amount of that mortgage.

Bottom Line

History has shown that a percentage of those 2 million+ homes will enter the distressed property category as some families decide it no longer makes sense to pay their mortgage. Any increase in short sales or foreclosures will impact prices in an area.


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5 replies
  1. Ken Montville
    Ken Montville says:

    In a recent attempt to refinance my personal home in an attempt to get the current low, low mortgage rates, I found out I’m one of the folks with negative equity with the emphasis on negative.

    Fortunately, for me and my wife, we have no intention of moving. It’s also fortunate we can continue to pay our mortgage going forward. So we won’t be a short sale or foreclosure statistic.

    This does, however, lead me to this feeling of being “trapped”. I can’t refinance and I can’t sell without being a short sale. If I did actually need to move, I’d be in a real pickle. I’m guessing that there are lots of people in the same position – financially able to pay their current mortgage but with negative equity.

    It’s a very sad situation.

    Reply
  2. Earl Ripling
    Earl Ripling says:

    Many of us are now seeing our homes not as the investments we once saw them as. Negative equity, near negative equity or large equity (because of the comfort zone a large amount down put us in with regards to a lower monthly payment) all these senarios are uncomfortable but are there. We can’t do much about it. But like our children who don’t do well in school, don’t hit the home run or score the decisive point, we just don’t walk away from them and neither should we walk away from our homes. We should remember that our homes like our kids and ourselves are part of a community. Our homes as entities like ourselves as humans in a society have responsibilities to the greater good . In this case our towns and neighborhood streets. our homes shouldn’t be left to deteriorate just because they aren’t performing as investment instruments. And it doesn’t take tremendous amounts of money to maintain our homes as responsible entities within the community. Our homes can contribute to the community in so many different ways. The simplest of course is to keep the yards neat. Also by being aware of and concerned for your homes carbon footprint. Turn off lites when not in use, many home owners can now choose where they get their electricity supply from and some of these choices include renewable energy supply sources again having your house contributing to a better community through using a higher grade of electricity. We need to think of our homes more as units of our communities and less of a particular investment gone south.

    Reply

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