More than 7 million previously underwater homeowners now have their heads above water. Once drowning because they owed more on their houses than they were worth, according to a new report the percentage of U.S. homeowners with underwater mortgages is down by almost half to 16.9 percent from 31.4 percent in 2012.
For many home buyers, this is welcome news. Fast-rising house prices have erased negative equity rates for underwater homeowners. Now, there are fewer homeowners wanting to sell who are stuck in their houses. Other factors such as job and income growth are contributing to falling negative equity, but to a lesser extent as we’ve seen largely stagnant wage growth and more Americans dropping out of the labor force or taking part-time jobs.
The negative equity rate is less than half of its highest value in 23 of the largest 35 metro areas. Cities such as Atlanta, Detroit and Las Vegas have seen a drop in underwater houses over the past two years as housing prices started to rise again. However, recovery is not even across levels of borrowers. Those who own less-expensive homes still struggle to get above water at three times the rate of those with the highest-priced homes.
The Wall Street Journal reports:
Negative equity has been a drag on the market in many areas. It traps homeowners, making it more difficult for them to sell and move. It also cuts back on the inventory of homes available to buyers, driving up the prices of homes that are unencumbered by large mortgages.
Thankfully for many owners, being “underwater” ended up being a transitory phenomenon. At the most dire point of the housing crisis, more than 31% of homes were underwater, according to Zillow, whereas in the third quarter only 17% of homes were. In Phoenix, more than 58% of homeowners owed more than their properties were worth during the crisis. That rate has come all the way down to 22%.
To be sure, home prices are still rising. But with the dramatic gains of this year and 2013 behind the market, the current state of affairs could be longer-lasting for those still paying outsize mortgages.
That will be especially vexing for borrowers who own less-expensive homes, according to Zillow’s report. The company split homes into three price categories based on their estimated values. In the highest-price tier, about 9.3% of borrowers were underwater in the third quarter, compared to 15.7% of borrowers in the middle tier and 27.4% in the cheapest tier.
Homeownership is a hallmark of the American Dream. Government policies that were meant to stimulate home ownership, especially for low-income, first-time, or minority buyers, date back to the 1970s but, though well-intended, sometimes incentivized lenders to engage in risky lending practices. From loosening eligibility requirements to creating loans that offered low initial interest rates which would balloon in the unforeseen future, Americans of all income levels entered into the housing market and too often purchased more house than they could afford, often thinking that the values of their home would only increase. Then the bubble burst and took the entire market with it.
As a nation, we’ve learned a tough lesson that nothing ever increases exponentially –except perhaps government debt. Those homeowners who were saddled with insurmountable debt, as this data indicate, have by and large been able to shed the monkey off their backs whether through rising house prices, paying down their mortgages, or by selling their properties (sometimes at a loss).
We can only hope this downward trend in negative equity continues and that we don’t see a new spending bubble emerge. The problem is, as we’ve recently reported, that Fannie Mae and Freddie Mack are back at it again. They announced that they are loosening restrictions on first-time home buyers once to encourage activity in the housing market. Nice idea, but bad policy.
For the sake of our recovering economy, Washington would do well to restrain itself from interfering in the economy. Allow market forces to correct demand and supply problems and in this case, it demonstrated that it does. Otherwise, the unintended consequences of wrong incentives will lead us down yet another unsustainable path that we may not recover from quite as “easily” again.