After three years of shrinkage, home equity gaining ground
WASHINGTON — 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 home equity is again on the rise.
Federal Reserve economists conduct massive ongoing research into mortgage balances and home-value changes in hundreds of local markets across the country and report findings quarterly.
The Fed's most recent "flow of funds" survey shows homeowners' net equity grew by nearly $1 trillion between the first and third quarters of 2009. From June 30 through Sept. 30, net equity rose by $418 billion.
That's not all that impressive compared with the quarterly increases registered during the housing boom years, but it could signal something important: After three years of unprecedented shrinkage in home equity — and three years of rapid gains in the numbers of borrowers with negative equity — there are signs the down cycle may be shifting.
On Wednesday, online real estate valuation researcher Zillow.com released its latest quarterly numbers on negative equity in major markets. The findings were sobering, but also offered 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 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 markets — including Tampa-St. Petersburg, Washington, Los Angeles, San Francisco, Detroit, Miami, San Jose and Seattle — the percentage of homeowners with negative equity appears to be on the decline.
Some of the largest declines occurred in cities hardest hit by the recession and the housing bust — Ann Arbor, Mich. (-9 percent); Riverside, Calif. (-5.7 percent); and Phoenix (-2 percent). Florida markets that have struggled with major price devaluations also saw significant improvement in negative equity ratios in the fourth quarter, such as Tampa-St. Petersburg (-1.4 percent), Fort Myers (-5.4 percent) and Miami (-5.1 percent).
On the other hand, Zillow's study found historically high rates of negative equity continuing to prevail in key cities. In metropolitan Las Vegas, for example, 81.3 percent of all homeowners — 256,000 households — were still 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.
Which major markets have the lowest underwater rates? They tend to be areas where the equity boom never quite boomed, and where toxic mortgages and questionable 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. In areas with large numbers of underwater homeowners, these homeowners see no reason to make monthly payments on properties worth tens of thousands, even hundreds of thousands, less than the principal balance owed. They feel they are throwing away money on albatross real estate that may take a decade or more to once again be worth what they paid for it.
Once underwater borrowers miss just one payment on their mortgage, some experts say, there's a 75 to 80 percent probability they will chuck the whole deal.
Borrowers with even minimal positive equity are far less likely to do the same.
Ken Harney can be reached at email@example.com.