Thursday, May 31, 2012

Digging Deeper Into Negative Equity Situation

By Gino Blefari, President & CEO, Intero Real Estate Services, Inc.

This past week, Zillow released its latest Negative Equity report, giving some numbers on the percent of homeowners who owe more on their mortgage than their homes are currently worth. Nearly 16 million homeowners were underwater on their mortgages in the first quarter of 2012, owing a collective $1.2 trillion more than their homes were worth, according to Zillow. That's nearly a third of all homeowners with mortgages, which sounds pretty bad if you ask me.

However, this is just the type of statistic that needs some digging to fully interpret and understand before allowing it to upset you or affect any buying or selling decisions.

As Zillow points out, despite being underwater, foreclosure is likely not imminent for most of these homeowners as 9 out of 10 continue to make their mortgage payments on time without any problems. Only 10.1% were more than 90 days delinquent with mortgage payments during the data period.

But let's also not forget that time can and will change things for homeowners. Being underwater is only a serious problem if a homeowner suddenly is unable to pay their mortgage and needs to sell, needs to sell for some other reason such as job relocation, or is facing a market and situation in which his value has dropped severely below market value – to the point in which the home is likely to not recuperate value over the homeowner's lifetime.

For most underwater situations, the owners will likely stay or want to stay in their homes for a long period of time, which gives the market a chance to recuperate value, in many cases. Not that long ago, people expected real estate values to move only in the long-term. In other words, no one was expecting to double their money in the next five years – or, by that same sentiment, to recuperate a dip in value in the next five years either.

In fact, if you apply the same principles as stock market investing, which requires more time to see increases in overall value of the original dollar put in, it feels more "normal" to take a long-term view on real estate values. Not many stock investors, which tend to be everyday workers who invest their retirement savings in portfolios that, by design, take at least 10 years to produce a meaningful investment outcome.

Another good point to the negative equity report is that many homeowners in negative equity are not deeply underwater, according to Zillow's numbers. Nearly 40% of underwater homeowners owe between 1 and 20% more than their home is worth. Of course, some owe much more and markets vary in severity of the problem, with Las Vegas, for instance, being a metro in which more than one quarter of homeowners with mortgages owes more than double what their home is worth.

As with all real estate statistics, it's important to construct the context around the negative equity report to get a clearer picture of what is happening and who is affected. Just because a homeowner is pronounced underwater doesn't mean he's in dire straits – or that his home will blight his neighborhood. A rise in negative equity wouldn't even necessarily mean there's an impending rise in foreclosures. Dig deeper to understand what is going on, folks!

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