Economic news has been generally mixed these days, but there has been one relatively bright spot: the significant rebound of home prices in many parts of the country has brought some four million people out of underwater positions. For a homeowner to be underwater, it means they owe more on their home mortgage than the home is worth, also called negative equity.
America's collective equity holdings rose almost 25% to nearly $10 trillion last year, putting more people than ever in a position to refinance and take advantage of today’s unusually low interest rates. Even with HARP (the Home Affordable Refinance Program), FHA Streamline refinancing, and other programs designed to assist underwater homeowners, the refinancing market had dried up to some extent, suggesting that most people who were in a position to refinance had already taken advantage.
Now that more people are rising out of negative equity and their LTV (Loan-to-Value) ratios are falling below the 100% mark, more people have an opportunity to qualify for refinancing at favorable rates. They can refinance to either lower their monthly payments or cut their overall interest payments. But are they doing so – and if not, why not?
While the overall numbers are promising, the recovery is still somewhat regional. Understandably, areas that were prone to higher volatility in both the rise and fall of home prices are still struggling. In particular, Nevada, Florida, and Arizona still have significant numbers of underwater homeowners, with Nevada leading the pack at 30.4% of all mortgage-bearing homeowners being underwater (as of early 2014). Fortunately, all three of these states are seeing steady improvement in home values. Therefore, we should see more people “above water” there soon.
Negative equity problems are found more in lower-priced areas than in higher-priced housing areas. This is logical – they correspond more to the suburban booms in low- to moderately-priced housing prior to the crash, as well as the higher-risk loans allowed to stretch home affordability to those who would not normally qualify.
We are in an unusual time right now in the housing market. Home prices are still rising, the housing inventory is relatively short (or, at best, mismatched with the current needs of home seekers), and interest rates are relatively low and continuing to fall when typical economic indicators suggest that they should be rising.
Simultaneously, banks are under pressure to kick-start the refinancing market or draw in more new homebuyers, and are beginning to drift away from the tighter loan restrictions applied by the Consumer Finance Protection Bureau (CFPB) at the beginning of the year. Credit and interest rates are sliding back toward enabling riskier loans.
Under these conditions, something should further spark the housing market, through either more people becoming eligible for refinancing or more people buying new homes. So far, there has been a small revival in the refinancing market – not enough to get excited about – but new single-family home starts and permits are not rising.
Perhaps the housing inventory is still too low for potential new homebuyers to find available housing in their price range, or those who did not qualify for financing before are going to need a longer time to do so now – due to stagnant wages, inability to save a down payment, or other limiting factors. The hardest-hit regions are likely to take a longer time to recover, dragging the overall numbers down.
It will be interesting to see how the housing market shakes out through the early fall of 2014. In an election year, panic-driven government policy to try to jump-start the housing market would not be a huge surprise. Let's hope that if that happens, it will be designed to provide long-term benefits as well as short-term ones.