The percentage of U.S. homeowners with mortgage debt that exceeds the value of their home declined slightly from the second to third quarters, in part because home prices are stabilizing but also because many homeowners who had been underwater lost their homes to foreclosure, Zillow.com reported today.
An analysis of public records collected for the Zillow Real Estate Market Reports suggests that 21 percent of homes with mortgages were underwater at the end of September, down from 23 percent at the end of June, Zillow said.
An index measuring home values in 156 metropolitan statistical areas (MSAs) tracked by Zillow was relatively flat, declining 0.4 percent from the second quarter to the third. Looking back a year, the index showed the median value of single-family homes, condominiums and cooperatives in those markets falling 6.9 percent, to $190,400.
But the rate of year-over-year price declines shrank for the third quarter in a row. Only nine MSAs — including the Merced, Calif., State College, Pa., and Salisbury, Md., MSAs — showed increasing year-over-year declines.
The index showed home values increasing in the last year in 24 of 156 MSAs, including Boston and Milwaukee, and holding their ground in 16 others.
The best-performing markets in the last year were Fayetteville, N.C. (up 10.8 percent); Cumberland, Md. (up 9.1 percent); Gainesville, Ga. (up 7.7 percent); Rochester, N.Y. (up 6.2 percent); and Green Bay, Wis. (up 5.3 percent).
"The decline in the percentage of homeowners with negative equity is a positive sign, and is directly attributable to the stabilization of home values from the second quarter to the third," Zillow Chief Economist Stan Humphries said in a statement. "It is also attributable to many homeowners who were previously underwater on their mortgage losing their homes to foreclosure."
A majority of homeowners with mortgages in several markets hard hit by foreclosures had negative equity in their homes. According to Zillow’s analysis, in Las Vegas 81.8 percent of homes with mortgages are underwater, and in Fort Myers, Fla., 60.5 percent of homeowners with loans have negative equity (some homeowners don’t have mortgages because they have paid off their loans or purchased their homes with cash).
Foreclosure resales accounted for 21.4 percent of all U.S. home sales in September, Zillow said, and more than half of sales in several MSAs including Las Vegas (67.5 percent) and the California communities of Merced (74.2 percent), Stockton (69.3 percent), Madera (68.7 percent), and El Centro (68.1 percent). …CONTINUED
Nationwide, 26.9 percent of homes sold during the third quarter went for less than what the seller originally paid, Zillow said. The percentage was higher in communities hard hit by foreclosure such as Stockton, Calif., where 56.8 percent of homes that changed hands in the third quarter were sold for a loss, and Las Vegas, Nev., where Zillow estimated 51.5 percent of sales involved a loss.
The data in Zillow’s Real Estate Market Reports comes from public sources, such as county recorder’s offices, that’s collected by a number of data providers and dates back to 1996.
Home prices in Merced, Calif., the worst-performing market during last year, are down 72 percent from their peak — back to where they were in the third quarter of 1998, Zillow said. In Las Vegas, the second-worst-performing market, prices are down 55.7 percent from peak, to second-quarter 2001 levels.
The next several months will be critical to the housing market, Humphries said. Last week’s extension of the homebuyer tax credit substantially increased the pool of eligible buyers, by raising income limits and allowing homeowners who have been in a principal residence for at least five of the last eight years to claim a tax credit of up to $6,500 if they sell that home and buy another (see story).
In a blog post, Humphries said he thinks increased demand generated by the tax credit will "soak up some of the foreclosures expected to flood the market in 2010," and help even out seasonal decline in home sales during the slow winter season.
Even in the best of times, sales will slow down in the winter months, but this year — thanks in part to all the demand that was "pulled forward" as buyers tried to take advantage of the tax credit before its original expiration date of Nov. 30 — "it looked like (the last three months of the year were) shaping up to be a really dismal period in the real estate market."
But the expanded the homebuyer tax credit could change the near-term trajectory of home prices, Humphries said. Zillow had been predicting that home values were likely to bottom in the second quarter of 2010.
Now, instead of further declines in home values followed by a more robust recovery, there could be a more immediate stabilization of home prices followed by a longer period of flat performance, Humphries wrote.
Humphries sees foreclosures as the biggest threat to a recovery, having previously estimated that a full-year extension of the tax credit would have generated only 334,000 additional home sales. With almost 3 million homes in the foreclosure pipeline, even that number is "like draining your bathtub with a spoon while leaving the faucet running," he concluded.
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