The number of US homeowners underwater on their mortgages is falling, but not as fast as prices are rising. That’s the news from real estate firm Zillow, who released data showing that around 8.7m homeowners were holding negative equity. That’s about 17% of US homeowners, but the trend is encouraging in that it’s down from 18.8% in the first quarter of 2014 and 23.8% a year ago.
The data also showed that the ‘effective negative equity rate,’ defined as the number of homeowners who have less that 20% equity in their home, fell to 34.8% in the second quarter, down from 36.9% in the first quarter of this year and 41.9% last year.
‘Effective negative equity’ is a term that covers people who technically don’t have negative equity, but who have to deal with many of its consequences, since they have so little equity they struggle to afford to move house or cover the costs of purchasing a new property.
The cycle of negative equity, failure to keep up with payments and risk of repossession brings undervalued properties onto the market, depressing prices and damaging the industry, apart from the human cost. But right now the trend seems to be in the opposite direction: prices are rising, and have risen steadily this year.
In future, the national negative equity rate is expected to fall to 14.9% by the end of the second quarter of 2015, according to Zillow’s Negative Equity Forecast.
However that’s likely to look a little different on the ground as, like prices, growth and sales, it can be expected to vary city to city.
Right now, Atlanta has 28.9% of its homeowners underwater, and Las Vegas has 27.4%. In Chicago, 27.1% of homeowners were facing negative equity at the end of the second quarter. Beating the odds at the other end of the scale, San Jose has 4.6% homeowner negative equity, 8.2% of San Francisco homeowners and 8.3% of Austin homeowners are underwater. These figures probably reflect long term trends.
There are key generational differences as well as geographical ones. Approximately 42.6% of ‘generation X’ (35-49 year-olds) homeowners are underwater; compare that with 15.3% of millennial homeowners, an age group considered to mean about 20 to 34, and 31.1% of ‘Baby Boomers’ aged 50 to 64.
Zillow’s chief economist Stan Humphries says, ‘on the surface, the housing recession did not overtly impact millenials’ housing wealth to the degree it did generation X and the Baby Boomers, as most millenials were too young to have purchased a home during the bubble years. But as this generation begins to consider buying homes, they’re entering a market still very much in recovery and far from anyone’s definition of normal.’
Traditionally, you’d expect homeowners in different age groups to be essentially on different steps of an escalator: get a little older, make a little more, move to a nicer house. But if the age group above you is mired in negative equity, they can’t afford to put their homes on the market. That means that millenials will struggle to step up until gen-X homeowners move on – and they can’t afford to. This effect partly explains the low figure for negative equity among millenials, who can’t move into the affordable starter homes that gen-Xers can’t afford to move out of.
As Mr. Humphries says, ‘Because so many homes are still in negative equity or are effectively underwater, the inventory of homes for sale is severely constrained,… and millennials don’t have the resources to compete with cash offers or engage in bidding wars.’
America’s housing market is still struggling to right itself, but while so many homeowners are underwater that return to normality is still some distance off.