Negative Equity down, but not due to home price increases, it is due to increasing foreclosures

How much negative equity is in your home? 

The biggest effect of the housing crisis has been the increase in negative equity in homes.  Negative equity, often referred to as “underwater” or “upside down,” means that borrowers owe more on their mortgages than their homes are worth. Negative equity can occur because of a decline in value, an increase in mortgage debt or a combination of both.  But in this case, it is because foreclosures have increased.  Foreclosures allows the banks to sieze the of those who were financing their real estate purchase, effectively cancelling any negative equity.

The foreclosure increase and resulting negative equity decline is a good thing only from the standpoint that banks are no longer pretending this problem doesn't exist anymore.  But, these banks are going to have to write off a ton of debt losses, and no one would say that an increase in writeoffs is a good thing.  Via Core logic:

During this year the number of borrowers in negative equity has declined by over 500,000 borrowers. An additional 2.4 million borrowers were near negative equity with less than five percent equity in the third quarter. Together, negative equity and near-negative equity mortgages accounted for 27.5 percent of all residential properties with a mortgage nationwide.

Data Highlights
  • Negative equity remains concentrated in five states: Nevada, which had the highest negative equity percentage with 67 percent of all of its mortgaged properties underwater, followed by Arizona (49 percent), Florida (46 percent), Michigan (38 percent) and California (32 percent).
  • The largest declines in negative equity were concentrated in the hardest hit states. Alaska experienced the largest decline, falling 1.8 percentage points, followed by Nevada (-1.6), Arizona (-1.4), California (-1.2), and Florida (-0.9). Idaho and Alabama are the only states with a noticeable increase, which is not a surprise given they are currently the two top states for home price depreciation.
  • At low shares of negative equity, the pre-foreclosure rate is higher for borrowers with more expensive homes (above $500,000) than for borrowers with low to moderately priced homes (between $100,000 and $300,000). Interestingly, once in deep negative equity, the relationship reverses with the low to moderately priced homes exhibiting fairly higher pre-foreclosure rates.
  • The aggregate level of negative equity declined to $744 billion, which is a three-percent decline from Q2 2010 and a seven-percent decline from the end of 2009 when it stood at $800 billion.

Q3 2010 Negative Equity FINAL


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