There have been a host of conflicting housing reports lately. Existing home sales are up, but median prices are down. The foreclosure backlog remains crushingly large, but mortgage rates remain at record lows. Some folks are starting to think the data indicates a recovery for home prices and the housing market. But for others, the problem of negative equity — or houses that are “under water” or “upside down” in real estate vernacular — trumps all other housing figures.
Negative equity is the all too common phenomenon where borrowers owe more on their mortgages than their homes are currently worth. At the end of Q4 2011, some 11 million, or 22.8%, of all residential properties with a mortgage were upside down, according to a new report from CoreLogic.
That’s up from 10.7 million properties, 22.1 percent, in the previous quarter. Worse yet, another 2.5 million borrowers have less than 5% equity in their home, meaning that a short slide in home prices will easily put them in the negative equity category.
Obviously the root cause of negative equity is falling housing prices, since folks paid more for a home and then watched the value erode over time. However, it becomes a vicious cycle because folks with negative equity often cannot afford to buy a new home or move — which creates a stagnant housing market and further drives down prices.
And the fact remains that foreclosure remain a disturbingly high portion of home sales, about 24% in Q4 and up from 20% in Q3.
In short, a large portion of people can’t sell their homes and a large portion of foreclosed homes are making up the sales volume. That’s a recipe for a market that strongly favors buyers — and may continue to create downward pressure on prices in the near-term.