Negative equity plague prolongs recovery

Large numbers of underwater homeowners in California are hampering a widespread economic recovery, per Zillow. Now, in 10% of Southern California cities, one out of five homeowners with a mortgage owes double the value of their home.

This ratio varies by location, as nearly one in three homeowners with a mortgage in Los Angeles County and greater than one in two borrowers in the Inland Empire owe more on a home loan than their property is worth. Data indicates that cities furthest from major job centers are the most underwater, with over 60% of underwater loans being from areas in the high desert, such as Palmdale and Lancaster, as well as Inland Empire locations, including Hemet and San Bernardino.

Such high ratios of underwater homes originally led experts to predict that large numbers of homeowners would walk away from their homes in order to prevent paying more than properties are worth. This prediction has not yet been realized, however, as data shows that those borrowers with higher initial down payments on homes were less likely to abandon properties, even if they could not afford to sell their homes to pay off their mortgages.

Still, Zillow predicts strong signs of an emerging recovery in sales growth for 2012, while noting that an economic recovery will continue to be complex. An increased confidence in economic improvement would be beneficial to real estate, resulting in a shift towards more move-up buyers with equity in their homes, per Housingecon.com.

Zillow’s prediction of strong sales growth this year isn’t grounded in reality. With the number of California’s negative equity homeowners having grown substantially as a result of the recent financial crisis, the state is now in a condition of stunted migratory lockdown.

Preventing homeowners from leaving their homes, negative equity is one of the leading contributors to the large decline in both interstate and intrastate migration.

Thus, homeowners are increasingly finding themselves stuck paying for black hole assets, rather than being able to sell and move on to better jobs and financial situations, thereby pressing the economy onward into recovery. Brokers and agents have the duty to inform negative equity homeowners they have long-term alternatives to free themselves of their black hole assets: shortsale or strategic default. They save cash, and later return to buy a home – when the time is right for buyer-occupants.

Related article:
Migratory lockdown: underwater homeowners confined

Still, going forward, a mandated 20% down payment is necessary to protect homebuyers from future equity losses once they purchase another home. With the Consumer Financial Protection Bureau (CFPB) deadline to formulate a definition for the qualified residential mortgage (QRM) fast approaching for the summer of 2012, a 20% down payment requirement may soon become a reality. However, with prices currently estimated to be 10% to 15% above the historical mean price, an eventual price drop will occur when the market finally returns to equilibrium.

Related article:
The homeowner debt debate

Yes, we know a mini-bubble in sales volume and pricing is passing through as we write. But it is produced by massive speculator intervention. Most will soon forget this current event as they have forgotten the volume and price surge at the end of 2009 brought on by state and federal stimulus.

For prospective buyer-occupants – users – of residential real estate, saving for a 20% downpayment now will be imperative to protect against an almost immediate loss in equity as prices continue to slip through 2013, and likely to continue into 2015. Although not the best for agents and brokers right now (and devastating for speculators), this savings accumulation will take some time.

Save now, put 20% down when you have it, and hold the property for at least ten years. Your investment would be as safe as if it had been stored in a  savings account (if not slightly better).

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