The CoreLogic Equity report for Q4 2014 brought some fairly sobering news to housing analysts. The number of homeowners with negative equity in their homes — in other words, owing more on their mortgages than their homes are worth, or “being underwater” — increased from Q3 2014, breaking a string of decreases throughout 2014.
The overall change in underwater mortgages was slight percentage-wise, from almost 10.4% in Q3 2014 to 10.8% in Q4 2014. However, that change represents around 172,000 homeowners that sank into negative equity on their mortgages. As of the end of 2014, 5.4 million homeowners were underwater to the tune of a collective $349 billion in negative equity.
If you are a glass-half-full person, you could point to the fact that fewer homeowners were underwater compared to the beginning of 2014, when 6.6 million homeowners accounted for $403 billion in negative equity. For the year, 1.2 million fewer homeowners were underwater and the collective negative equity decreased by 13.4%. It is also common for the fourth quarter to show weakness in home valuations, according to CoreLogic Chief Economist Frank Nothaft.
Do you prefer the half-empty glass? You may want to look at the amount of those near the “waterline”, or those with slightly positive equity in their homes. Equity amounts below 20%, the standard down payment amount, are typically considered as having insufficient equity and prone to falling underwater with a relatively small decrease in home values or increase in mortgage debt.
There are nearly fifty million residential mortgages in the U.S. and ten million of those were below the 20% equity mark at the end of 2014, with 1.4 million at less than 5% equity. Thus, a 5% drop in home prices — not at all an outrageous possibility — could drastically increase the number of underwater homeowners. Even if home prices stay flat, those with 5% equity are likely going to have a difficult time refinancing their homes.
Switching back to the half-full-glass perspective, a 5% change in the other direction would bring another one million homeowners out of negative equity — which is exactly what the President and CEO of CoreLogic, Anand Nallathambi, is predicting for 2015.
The report contains other insightful information about the housing debt and equity distribution. For example, around 2.1 million of the homeowners with underwater mortgages hold first and second liens on their property, with an average debt of $295,000 and a negative equity amount of $77,000. These people are in a far more precarious position than the remaining 3.2-3.3 million homeowners with underwater mortgages and single liens ($228,000 average debt and an average of $57,000 in negative equity).
As in previous reports, underwater homes are concentrated in a few states and cities that were hit hardest by the housing downturn and that have yet to fully recover. The five states with the greatest percentages of homes with negative equity accounted for almost 32% of all underwater mortgages nationwide.
Those states, with their respective percentage of underwater homes statewide, are Nevada with 24.2%, Florida with 23.2%, Arizona with 18.7%, Illinois with 16.2%, and Rhode Island with 15.8%. The three metropolitan areas with the highest percentage of underwater mortgages are Tampa-St. Petersburg-Clearwater, FL (24.8%), Phoenix-Mesa-Scottsdale, AZ (18.8%) and Chicago-Naperville-Arlington Heights, IL (18.5%).
Let’s hope that the CoreLogic CEO is right and that home prices do rise, reducing the number of underwater homeowners. We cannot really consider an economic recovery complete until the housing market strengthens and more homeowners are spared worries about potentially losing their home.