Few would argue with the progression that has been made from the depths of the recession until now. The expansion of the economy has seen historically high appreciation rates, and younger Americans have once again begun to participate in the housing market. For all intents and purposes, things are heading in the right direction – albeit at a slower than expected pace. That is, of course, with the exception of one factor: negative equity. Too many homeowners owe more on their home than it is worth – essentially stripping them of the option to sell. Underwater homeowners are not able to meet the demands of lofty spring expectations. There is simply too little of an inventory for potential buyers to choose from.
According to CoreLogic, “5.4 million homes, or 10.4 percent of all homes with a mortgage, were still in a negative equity position, or ‘underwater,’ in the fourth quarter of 2014.” Of particular importance, however, is the drop in underwater mortgages since this time last year. In fact, over the course of a year, the amount of people who owe more on their home than it is worth dropped 8.5 percent. Either way you look at it, those today’s numbers represent a significant drop in underwater homes. However, even at 10.4 percent, 5.4 million homeowners are unable to place their house up for sale. At that rate, inventory levels take a significant hit.
Inventory levels are hampered even more when you consider that those with equity may not have enough to do anything with it. According to data presented by CoreLogic, “of the 49.9 million U.S. homes with a mortgage, approximately 10 million (20 percent) have less than 20 percent equity, and 1.4 million have less than 5 percent.” With less than 20 percent equity in an asset, homeowners still can’t afford to sell. At that rate, they risk not only loosing money, but their chances of receiving mortgage approval on a subsequent home is less than encouraging. Much like those that are underwater, homeowners with little equity are detracting from current inventory levels.
“Negative equity continued to be a serious issue for the housing market and the U.S. economy,” said Anand Nallathambi, president and CEO of CoreLogic. “We expect the situation to improve over the course of 2015.”
Fortunately, appreciation rates should continue to favor those with little to no equity. Higher home prices will continue to add equity to the market, and homeowners will gain a little breathing room. Those that are currently on the fence may just need to wait a little longer until selling is an option. Accordingly, rising prices made it possible for more than 1 million homeowners to return to a position of positive equity. At this point, experts expect 2015 to make similar progress in the equity market. However, with the first day of spring just days away, buyers are looking for more inventory and not finding it.
Compounding the issue even further, most of the negative equity is concentrated towards the lower end of the market. In fact, the owners of cheaper properties are nearly three times more likely to be underwater than those at the other end of the spectrum. Appreciation rates seem to favor more expensive areas. San Jose and Austin, for example, have the lowest rates of negative equity and some the fastest appreciation rates in the country.
Perhaps even more importantly, supply is lacking in neighborhoods with less expensive housing. Builders have even begun to focus their attention on higher-end areas because of the resulting spreads.
Essentially, first-time buyer demand is increasing with the expansion of the economy. Millennials, in particular, have finally started to return to the market. However, they have nowhere to go. Underwater homes are strangling the inventory supply, especially in the lower priced neighborhoods that younger Americans can afford.