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Zillow: Negative Equity Persists in 21 Housing Markets

Back in March, Zillow released a report showing that, in 21 out of the top 50 U.S. housing markets, some underwater home owners are sinking deeper into debt. This seems contradictory to the face that home values are generally rising across the board around the country. Confused by the paradox, I asked Mike Canning, our real estate guru, to share his thoughts on the article.

1. What was your initial reaction after reading the Zillow report?

I am not particularly surprised by the findings of this study.  While in some of these areas, such as New Jersey, U.S. Housing Marketlegislative action slowed the foreclosure process to the point that only now many of these homes are beginning to impact the non-foreclosed home sale market, impacting the appreciation negatively.  In other markets, where appreciation soared prior to the housing recession, the equity position is still lagging.

2. Can you explain negative equity and how it serves as a housing market indicator?

Put simply, you have negative equity when you, the seller, is bringing money to the closing table rather than pick up a check to the settlement table. You are negative (or underwater) when your mortgage(s), equity loan(s), taxes owed, and other property liens, transfer taxes, repairs, concessions and settlement charges all add up to more than the property value.

3. Why are owners of the lowest valued homes most likely to be stuck in a negative equity situation? Why is this problem worsening for them and for the market in general?

Lowest value homes are typically those purchased by first time home buyers and those with the most limited means.  When the market was booming in 2007, these buyers became eligible to purchase as a result of sup-prime and the alternate lending methods that were prevalent at the time.  The housing market was on a sustained growth path so everyone and every investor wanted a piece of the action.  With an increased influx of first time and low income buyers, home prices in this market soared.  The upper value homes also saw a rise, due to the “move up” buyers.  However, they were using the equity they realized in their first home, which in many instances was considerable.  Therefore, these buyers were in a starting position of higher equity.  And, although they may have actually lost as much or more equity in the collapse, they started in a better position.

This predicament is not improving for this group, especially, because the usual first time buyers are no longer out looking in the market. More are opting to rent due to tighter financing requirements.

4. How can underwater homeowners resolve this problem?

This is a waiting game.  First, you must have a clear understanding of your breakeven point, or the point where you can afford to sell. For this, you will also need to have a clear understanding of your debt, as well as anticipated closing costs that will come with a sale.  Lastly, you must be ready to compete for the limited buyers in your home’s range.  Just because there isn’t much competition, today’s buyers are patient and feel less sense of urgency than you would think.  Interest rates have been holding historically low, and if your home is not in the best condition for the price, they buyers will know and pass.

In the coming weeks, we will be taking a close look at housing markets across the country. Stay tuned for more in-depth coverage on the issue.

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