How Underwater Are American Households?

In early June, CoreLogic released its analysis of negative equity data for the United States housing market.  In this interesting quarterly report, CoreLogic analyzes which residential real estate markets in the United States have the highest and lowest percentage of households with negative equity and quantifies the negative equity that borrowers in each state average.  The report also examines which states have what CoreLogic terms "near negative equity"; these are the households that have less than 5 percent equity in their homes.  For those of you who aren't aware, negative equity (also referred to as "underwater" are borrowers/mortgage holders that owe more on their mortgages than their homes are worth.  As CoreLogic notes, negative equity can result from either a decline in the value of the home, an increase in the total amount of mortgage debt or some combination of the two factors.  In many cases, the extraction of equity from homes through the use of home equity loans is to blame for the problem as we'll see later.

As background information, the CoreLogic study includes data from 48 million properties across the United States; this accounts for over 85 percent of the country's mortgages.  Data was only used for properties that were valued between $30,000 and $30 million which should cover most of us!

When compared to the first quarter of 2011, the negative equity situation was slightly improved.  In the second quarter, 10.9 million residential properties with a mortgage were in negative equity compared to 11.1 million in the first quarter of 2011.  This translates to 22.7 percent of all residential properties in Q2 compared to 23.1 percent in Q1.  In addition, 2.4 million additional borrowers had near negative equity (as defined above).  When the negative equity and near negative equity borrowers are summed, 27.7 percent of all residential properties with a mortgage are in deep trouble.

Now let's look at the state-by-state data starting with the three states that have the highest percentage of underwater properties, the percentage of those properties and the trend from the previous quarter.

1.) Nevada: 63 percent underwater, down 2.7 percentage points

2.) Arizona: 50 percent underwater, down 1.3 percentage points

3.) Florida: 46 percent underwater, down 1.3 percentage points

Now let's look at the three cities with the highest percentage of underwater properties:

1.) Las Vegas: 66 percent underwater

2.) Stockton: 56 percent underwater

3.) Phoenix: 55 percent underwater

Nationwide, the average negative equity mortgage holder was underwater by $65,000.  According to the study, this amount varied widely by state.  Here are averages for the three top states:

1.) New York: underwater by $129,000

2.) Massachusetts: underwater by $120,000

3.) Connecticut: underwater by $111,000

The three states with the lowest average negative equity are as follows:

1.) Ohio: underwater by $31,000

2.) Indiana: underwater by $34,000

3.) Minnesota: underwater by $38,000

The part of the study that I found very interesting was the data on mortgage holders that had borrowed against the equity in their homes, a very common occurrence when home prices were rising in the early to mid 2000's.  Nationwide, borrowers with positive equity in their homes had an average of only 1.2 loans per property.  On the other hand, borrowers with negative equity had an average of 1.6 loans per property and when negative equity rises to a loan-to-value ratio of 150 percent or greater, borrowers had over 1.7 loans per property.  Only 18 percent of borrowers with no home equity loans were underwater compared to 38 percent of borrowers with home equity loans.

Finally, let;s take a quick look at the default rates for various degrees of negative equity.  Where borrowers have a loan-to-value ratio of 150 percent or higher, they have a default rate of 12 percent.  This drops to approximately 7 percent for borrowers with loan-to-value ratios of between 125% and 149% and continues to drop to approximately 2 percent for borrowers with loan-to-value ratios of between 100 and 104 percent.

While the negative equity situation for borrowers has improved very slightly over the past quarter, data shows that it has improved very little over the past year.  Since the first quarter of 2010, borrowers with negative 25 percent or greater equity in their homes is firmly stuck at 10 percent of all homeowners.  Despite Mr. Bernanke's protestations to the contrary, unless the economy really takes off in the second half of 2011 and creates a massive number of high paying jobs, this situation is unlikely to improve in the foreseeable future.  The impact of negative equity households on America's real estate market will continue to keep prices from rising and, if the economy softens as it appears to be doing, it is likely to lead to even greater numbers of foreclosures entering the market acting as a brake on any housing market recovery.