The Nation's Housing

Good real estate news: Home equity is rising again

By Kenneth R. Harney
Saturday, February 13, 2010

With all the bad news about underwater homeowners and strategic walkaways, you might think that American homeowners' equity holdings are in the tank. But the least-publicized recent statistic on real estate is that, despite these scary reports, home equity is again on the rise.

Is that some piece of rosy propaganda put out by housing lobbyists to stimulate more home buying? Not unless you consider Federal Reserve economists to be shills for the real estate industry. The Fed conducts massive research into mortgage balances and home-value changes in hundreds of local markets around the country and reports its findings quarterly.

According to the Fed's most recent "flow of funds" survey, homeowners' net equity grew by nearly $1 trillion from the recession's nadir in the first quarter of 2009 through the third quarter. From June 30 to Sept. 30, net equity rose by $418 billion.

That's not all that impressive compared with the quarterly increases during the hyperinflationary housing boom years, but it could signal something important: After three years of unprecedented shrinkage in home equity -- and three years of rapid expansions in the number of underwater borrowers with negative equity -- there are signs that the down cycle may be shifting.

Last week, online real estate valuation researcher released its latest quarterly numbers on negative equity in major markets. The findings were sobering, but the study also offered some hints of modest improvements for housing. The overall negative-equity rate among American homeowners remained flat in the fourth quarter, at 21.4 percent. But like the Fed's numbers, that ratio represented a slight decrease from the first two quarters of last year, when 22 percent and 23 percent of owners owed more on their mortgages than the estimated market value of their real estate.

Zillow's study found that in dozens of housing markets -- including the District, Los Angeles, San Francisco, Detroit, Miami, San Jose, Seattle and Tampa-St. Petersburg -- the percentage of homeowners with negative equity appears to be on the decline. In the Washington area, 27.5 percent of homeowners had negative equity in the fourth quarter. That was down from 29.6 percent in the third quarter and 33.5 percent in the second.

Some of the largest declines occurred in cities hardest hit by the recession and the housing bust: Ann Arbor, Mich. (a decrease of 9 percentage points); Riverside, Calif. (-5.7); and Phoenix (-2). Florida markets that have struggled with major price devaluations also saw significant improvement in negative-equity rate in the fourth quarter, such as Fort Myers (-5.4), Miami (-5.1), Naples (-4.5) and Tampa-St. Petersburg (-1.4).

On the other hand, Zillow's study found historically high rates of negative equity continuing to prevail in key cities. In Las Vegas, for example, 81.3 percent of homeowners -- 256,000 households -- were underwater on their mortgages in the fourth quarter. This number is down from 82.5 percent in early 2009, but that's no consolation to the affected borrowers.

In Phoenix, 61.5 percent of borrowers were in negative territory. That's two percentage points lower than in the previous quarter but still scarily high.

Which major markets have the lowest underwater rates? As you might guess, they tend to be areas where the equity boom never quite boomed and where toxic mortgages and fog-the-mirror underwriting by lenders were never the rage: Tulsa, Okla. (4.2 percent); Harrisburg, Pa. (5.7 percent); Binghamton, N.Y. (5.6 percent); and Peoria, Ill. (8 percent).

Negative-equity rates are crucial barometers of local housing markets' propensity to experience high rates of mortgage default, foreclosure and strategic walkaways. Communities with single-digit negative-equity rates tend to have fewer walkaways and foreclosures.

The reverse is the case in areas where large numbers of underwater homeowners see no economic rationale for continuing to send in their monthly mortgage payments on properties worth tens of thousands, even hundreds of thousands, of dollars less than the principal balance owed to the bank. They feel they are throwing away money on real estate that might take a decade or more to be worth what they paid for it during the boom.

Mortgage market analyst Laurie Goodman, senior managing director of Amherst Securities, recently warned lenders to be especially vigilant about borrowers in markets where negative-equity ratios are high because, in her view, they are prime candidates to walk away from their loans. Once underwater borrowers miss a payment on their mortgage, Goodman said, there is a 75 to 80 percent probability they will chuck the whole deal.

Borrowers with even minimal positive equity, on the other hand, are far less likely to do the same.

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