Due to the steep descent of home prices during the Great Recession, millions of American homeowners found themselves in the difficult straits of owing more on their house than the residence was now worth, which is a state of personal economics casually known as being underwater.
After five tough years, in which tens of millions of Americans found themselves underwater on their mortgage, the country is finally resurfacing. The slow but steadily improving economy and housing market has helped. Plus, there are some new technologies out there to give comfort to those who are still in deep water.
Back in the fourth quarter of 2009, about 26 percent of borrowers were underwater on their mortgages, according to CoreLogic. It took about two years for those numbers to drift downward to 25.2 percent, which equates to 12.1 million mortgage borrowers.
Then at the end of the first quarter this year, CoreLogic reported the percentage of mortgage borrowers underwater had finally dropped below the 25 percent level, falling all the way to 23.7 percent, or 11.4 million mortgage borrowers, meaning 700,000 homeowners who had previously been underwater had risen to the surface.
"This was the first major movement we had in negative equity in the last few years," said Mark Fleming, chief economist at CoreLogic.
Of course, not all markets have benefited by the trend. Using CoreLogic data, the Wall Street Journal reported Nevada was the No. 1 state in the country for borrowers underwater. With 61.2 percent of mortgages underwater, Nevada was all the only state with more people underwater than in mortgage normality.
Second on the WSJ’s list was Florida with 45.1 percent of mortgages underwater; then came Arizona, 43.4 percent; Georgia, 37.2 percent; and Michigan, 35.6 percent.
The ancillary problem stemming from such a large portion of homeowners being underwater is that it is an applied restriction on the housing market: Borrowers who are underwater can’t put their homes up for sale and move away unless they want to lose a lot of money.
On the other hand, a key driving force at the moment is that in markets that had high levels of negative equity (like the WSJ Top Five mentioned above), those same places are experiencing the strongest upward price movements.
"In places like Phoenix," Fleming said, "the monthly supply of homes for sale is well below 6 percent, which is the equilibrium level of supply, so house prices are rising. Other hard-hit markets also have low monthly supply."
Fleming added, "Markets that have more than 6 percent negative equity such as the ‘sand’ states (Arizona, California, Florida and Nevada) have an average four-month supply of homes for sale. Conversely, markets with very little negative equity have about an eight-month supply. There is a big difference between the supply levels, which is one of the reasons prices are moving."
Also, there is a bit of seasonality to the national underwater numbers.
"House prices over the last few years have risen in the spring," Fleming explained. "Negative equity patterns continued with a seasonal pattern in the past quarter. House price rises will temper through the remainder of the year."
The better news with being underwater these days is that you can now refinance. In the good old days, the standard rule for refinancing was that you needed to have 20 percent equity in your house. Both underwater borrowers and insufficient-equity borrowers were unable to access refinancing dollars to capture the lower interest rates that were out there.
The Federal Housing Administration and HARP (Home Affordable Refinance Program) have basically removed these constraints for the vast majority of borrowers. If you have a Fannie Mae or Freddie Mac loan and if you are at 120 percent loan-to-value and deeply underwater, you can now refinance through the HARP program.
If you are underwater and worried about the future, i.e., how long you will remain underwater as home prices rise, you might want to turn to HSH Associates. The Pompton Plains, N.J., publisher of mortgage information recently unveiled an app that will calculate how long you will be underwater.
I called Keith Gumbinger, HSH vice president, to see what the new app was all about.
By plugging in some personal information such as when you bought your home and your mortgage data, he tells me the calculator will inform you how much underwater you are by thousands of dollars, by what percentage, and will give you a time in the future when you will no longer be underwater after taking into consideration the process of amortization.
"You are going to be paying your loan down even if your home never recovers value, so eventually your mortgage will start to disappear and you will find yourself back at breakeven," Gumbinger said. "In addition, home prices might actually change at some point in the future, so you can say, for example, if I have a 1 percent appreciation annually over the next couple of years, how does that change the picture, how much sooner will I be out from underwater?"
I asked Gumbinger why HSH decided to create the app.
"It’s a simple answer," he said. "We have been in this underwater circumstance for a number of years now. If I was a homeowner who was underwater and trying to plan where the hell I’ll be in the future, I would want to know when I’m not going to be underwater anymore."
So, nationally, how long will we be in this "underwater circumstance"?
"It’s a very deep hole," Fleming said, "and it is going to take a long time to work our way out of this. That fact that we are working our way out is better than not working our way out. It’s not to say that things will get back to normal — if anyone can argue what is normal these days."
He added, "Negative equity is going to be around for a number of years for many borrowers. For the hardest-hit borrowers in places like Las Vegas, things are getting better but negative equity is not going to disappear quickly."
Steve Bergsman is a freelance writer in Arizona and author of several books. His latest book, "Growing Up Levittown: In a Time of Conformity, Controversy and Cultural Crisis," is now available for sale on Amazon.com.
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