CoreLogic reported Thursday that the number of underwater homes, properties worth less than what is owed on them, fell from 6.3 million to 5.3 million between the 1st and 2nd quarters of 2014. This change is large and important for the health of the housing market.
The decline in negative equity reduces the number of owners that are susceptible to foreclosure in the case of a health issue or loss of work. Distressed sales damage their owner’s credit scores and can weigh on local home prices and confidence as well as banks’ willingness to lend.
According to the report, negative equity and “near negative equity”, those with less than 5% equity in their home, are heavily concentrated at the lower end of the price spectrum. This trend holds back supply from potential entry-level buyers who have competed with well-healed investors for several years. Tight lending conditions, weak labor markets, and student debt issues have compounded the issue for first-time buyers.
The majority of states have negative equity of 10% or less, but a stronger majority have a near negative equity share of 2% to 4%. Steady price appreciation in a historic range of 3-5% should push more owners into a position where they could trade up, unlocking inventory that is disproportionately entry-level. This would help to alleviate supply conditions at the lower end, while providing support at the upper end of the market where investors have not been as active.
Investors’ share of sales in August, as measured by NAR’s Realtor Confidence Survey, fell from 16% in July to 12%. As investors pull back and inventory comes on line, an opportunity opens for potential owner occupants, a change that could help to stabilize the downward trend in homeownership.
Ken Fears is the Manager of Regional Economics and Housing Finance Policy. He focuses on regional and local market trends found in the Local Market Reports and the Market Watch Reports . He also writes on developments in the mortgage industry and foreclosures.