Joe Naccarato's Real Estate News You Can Use: Houses Underwater: The Tide Is About to Rise

by The KCM Crew on September 14, 2011

Two separate housing reports came out in the last week which discussed different challenges facing the current real estate market. The first was CoreLogic’s Negative Equity Report and the second was JP Morgan Chase’s Home Price Monitor. Each report delivered some difficult news. However, if you piece both reports together, we can see future challenges are in store for home values.

Negative Equity

When a home’s current value is less than the existing mortgage on that home, the house is said to be in a ‘negative equity’ situation (other terms used to describe this situation are ‘underwater’ and ‘upside down’). The CoreLogic report stated:

“…that 10.9 million, or 22.5 percent, of all residential properties with a mortgage were in negative equity at the end of the second quarter of 2011… An additional 2.4 million borrowers had less than five percent equity, referred to as near-negative equity, in the second quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide.”

This is important because studies show that people in a negative equity situation are more likely to default on their mortgage payments than people who have equity in their homes.

Home Prices

Many experts believe that housing prices will soften through this winter. According to an article in HousingWire, analysts from JP Morgan Chase announced in their recent Home Price Monitor:

“Home prices could dip another 6% to 7%, before hitting rock bottom in early 2012.”

Let’s Combine the Information

The CoreLogic report said there are an additional 2.4 million households with less than 5% equity. The JP Morgan Chase report said that prices will drop another 6 to 7% in the next six months. That leaves an additional 2 million+ homes in the near future that will be faced with the decision to pay (or not pay) the mortgage payment on a house no longer worth the amount of that mortgage.

Bottom Line

History has shown that a percentage of those 2 million+ homes will enter the distressed property category as some families decide it no longer makes sense to pay their mortgage. Any increase in short sales or foreclosures will impact prices in an area.