There has been a lot of recent talk about mortgages in negative equity – underwater homes – and the impact on the housing market. In response, First American CoreLogic asked the question: When will these homes start to float?
The company estimates that the typical underwater homeowner will not begin to surface until late 2015 to early 2016. It’s an even longer stretch for some of the most depressed markets, where First American CoreLogic says the typical borrower in negative equity may not experience positive equity until 2020 or later.
Even 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, the company has concluded.
Although house price appreciation will, over time, offset negative equity, First American CoreLogic says amortization (the paying down of loan balances) will be a more significant remedy to negative equity. The company’s data shows that over the next 10 years, the
average loan balance will decrease by an annual rate of 3.3 percent; meanwhile home prices are expected to increase at a 3 percent annual rate over the next decade.
To forecast when the typical U.S. homeowner will achieve neutral and positive equity, First American CoreLogic looked at 10 key markets, plotting equity trends over the next decade, and assuming a nominal annual appreciation rate of 3 percent.
Of the markets studied, the Washington D.C. area is expected to reach positive equity by 2015.
Atlanta, Georgia; Dallas, Texas; and Riverside-San Bernardino, California are projected to rise to the surface in 2016. Boston, Massachusetts should find a balance in 2017.
Cape Coral-Fort Myers, Florida; Pittsburgh, Pennsylvania; Las Vegas; and Lancaster, Pennsylvania are forecast to reach positive territory by 2020.
Detroit, though, is not projected to recover even by 2020, because of its depressed economy.
The latest numbers from First American CoreLogic show that more than 11.3 million, or 24 percent, of all residential properties with mortgages were underwater at the end of the fourth quarter of 2009.
Among the new housing initiatives announced by the administration Friday was assistance for borrowers with negative equity. In order to deter these homeowners from strategically defaulting, the Treasury will begin requiring servicers to consider principal write-downs as part of their Home Affordable Modification Program (HAMP) evaluations for borrowers whose loan balance is more than 115 percent of the property’s current value. The plan also includes a Federal Housing Administration (FHA) refinancing program for negative equity mortgages.