Negative Equity and Short Selling in the US

Increasing Mortgage Foreclosure a Feature of American Housing Market

May 29, 2009 Neil Gunn

As house values continue to drop, an increasing number of US homeowners owe more on their homes than they are worth, according to Zillow.com, a real estate data website.

First quarter property values in the US dropped around 14% from the year before: “Reducing the median value of US, single family homes, condominiums and cooperatives to $182,378. The decline has left about 20.4 million of the US’s 93 million houses, condos and co-ops with loans higher than the property is worth. The gain in underwater (negative equity) homeowners will lead to more bank repossessions,” said Zillow.

A further report released by First American CoreLogic said the 8.3 million American mortgages were “upside down” at the end of the year (2008) up from 7.6 million the previous quarter. In the United States a staggering 17.6% of homes are now underwater as are 41.2% of all mortgages for homes bought in the last year, according to Zillow.

Negative Equity

The report highlights not only the increasing levels of negative equity, particularly in California, Nevada, Arizona and Florida, but also expresses concern about its geographical widening. Nevada was the state with the largest percentage of negative equity with more than half its residents in that unenviable position. The average loan-to-value ratio said CoreLogic was 97%, or less than $8,000 in equity. California topped the list in terms of numbers with around 1.9 million people in negative equity.

Short Selling

Increasing negative equity and short selling has become a feature of the US real estate market. Short selling can be a time consuming process, as the mortgage lenders have to agree to write off the difference between what’s owed and what the house sale realizes. With job losses and falling house prices added to the mix, foreclosure has now become a reality for many Americans.

US Foreclosures

CNN Money reporting on the 2008 foreclosure statistics revealed a catastrophic rise of 81%. That was 861,664 real families that lost their homes. There was an element of surprise in some quarters at the rise, particularly in December, because of the moratoria put in place by Freddie Mac, Fannie Mae and other key lenders, which was aimed at delaying foreclosure action to householders in financial trouble.

There seems little good news on the horizon and to make matters worse there are, say CoreLogic, a further 2.2 million mortgaged properties, throughout the country, that are approaching negative equity. They are within 5% of being underwater.

Although the US administration has a mortgage plan in place to help homeowners refinance, Sam Khater at CoreLogic said: “It probably won't be enough to solve the foreclosure problem.”

Sources:

Les Christie, Foreclosures up a Record 81% in 2008, CNN Money 15 January 2009

Zillow.com Real Estate Market Report, First Quarter January – March 2009

First American CoreLogic, Homes Under Water, December 2008

The copyright of the article Negative Equity and Short Selling in the US in Mortgages/Loans is owned by Neil Gunn. Permission to republish Negative Equity and Short Selling in the US in print or online must be granted by the author in writing.