Recently the decline in home prices and the rise in negative equity have been well documented. First American CoreLogic research indicates that more than 11.3 million, or 24 percent, of all residential properties with mortgages, had negative equity at the end of the fourth quarter of 2009. A borrower is in negative equity if he or she owes more on the mortgage than the home is worth. Given that the largest home price declines have already occurred and negative equity is not expected to continue to increase significantly, the question going forward is: “how long will these borrowers will remain underwater?” To answer that question, future home values and unpaid principal balances were projected for a selected set of Core Based Statistical Areas (CBSAs) to gauge how long it will take for the average underwater borrower to return to positive equity.
For the typical underwater borrower in the U.S. it will take until late 2015 or early 2016 for negative equity to disappear. In certain markets, it will take another five to 10 years or even longer to return to positive equity. For example, Detroit is not projected to recover even by 2020, because of its depressed economy. In markets with low shares of negative equity, the recovery time will still be long because the few borrowers that are upside down are deeply in negative equity and these are typically not high appreciation markets. Although house price appreciation will, over time, offset negative equity, amortization (the paying down of loan balances) will in most cases be a more significant remedy to negative equity. Over the next 10 years, the average loan balance will decrease by an annual rate of 3.3%; meanwhile home price are expected to increase at a 3% annual rate over the next decade.
Of the ten markets studied, the Washington-Arlington-Alexandria CBSA is expected to reach positive equity by 2015; Atlanta-Sandy Springs-Marietta, Dallas-Plano-Irving and Riverside-San Bernardino-Ontario are projected for 2016; Boston-Quincy by 2017; and Cape Coral-Fort Myers, Pittsburgh, Las Vegas-Paradise and Lancaster, PA by 2020. It is estimated that Detroit will not reach positive equity until after 2020.
Alternative scenarios – using higher and lower long-term price appreciations and alternative speeds for the recovery in home prices to the long-term average – were also considered. Assuming a 5% nominal price appreciation nationally (which would be much higher than historical appreciation, given today’s low inflation environment), the early markets will approach positive equity by 2013 and the majority will be positive equity by 2017. Assuming 1.5% nominal price appreciation, which would be fairly low relative to history, the earliest markets will not reach positive equity until 2017. When alternative scenarios of how long it takes home prices to revert to the long-term average were tested, they had a moderate impact, but not as large as the absolute level of home price appreciation or amortization assumptions.
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Michael Caruso, Broker ABR ABRM CRB CRS GREEN GRI
2007 President, Orange County Association of Realtors (949) 753-7900