Why under-equipped homeowners are a time bomb for the real estate economy
For nine years, a specter has haunted the country’s real estate economy and wreaked havoc on sales targets, inventory, refinances and property values. Invisible to the naked eye, it strikes at the least expected moment to slow the recovery or turn someone’s American dream into a nightmare.
Today, this curse is a fraction of its original size. His decline has led many to believe his threat is over. Think again.
The housing depression has created a new subclass of homeowners who cannot sell or refinance for two reasons. Because they owe more on their homes than they are worth. Or because they’re out of the water but don’t have enough positive equity to cover selling costs or the 20% positive equity that lenders need to refinance.
For the most part, their dismal status is not their fault. They took out conventional mortgages at the top of the bubble when everyone was buying a house, got caught up in the crash and paid the price for almost a decade. Their houses look old and worn out because they lack the equity to renovate them. Their children are struggling with student debt because their parents have no equity to use to pay for school fees. They are paying 5.5% on their mortgages while everyone else has gone back to 3.5%.
These are the under-equipped. They own about 10 million homes, or about 20% of the 49.9 million mortgage homes, according to CoreLogic’s latest equity report. That’s one in five homeowners with a mortgage.
The impact of the under-equipped on the housing economy is amplified because they are concentrated in certain markets. These markets are the places that have suffered the most from the housing crisis – the so-called sandy states of California, Arizona, Nevada and Florida. In these markets, prices have fallen further and created more submarine and under-equipped owners than elsewhere. However, legions of the under-equipped can still be found in every market where buyers bought when values were higher than they are today. According to data from Homes.com, 60 percent of the country’s top 300 markets have yet to regain their peaks.
The under-equipped are more likely to be in the mid to low price points. In fact, some homeowners trapped deep underwater could essentially be in negative equity forever, according to research from Zillow’s Svenja Gudell. Homeowners at the bottom of the economic ladder are much more likely to own the cheapest homes in the United States. Many of them are not just underwater, but deep underwater.
Over the past three years, we’ve been put to sleep by heartwarming headlines from trusted sources such as CoreLogic and RealtyTrac reporting that the number of underwater and under-equipped owners has been steadily declining. The number of submarine owners increased in the fourth quarter of last year, but that’s not the real issue. The HARP program, which is coming to an end, has helped some 3.4 million homeowners, most of them under-equipped, to refinance themselves. But HARP only helped half of all mortgage holders whose mortgages belonged to Fannie or Freddie – everyone else was unlucky.
A time bomb is on the move. The average American homeowner moves every eight years, but not if they are under-equipped. Baby boomers who bought before the crisis are thinking about retirement, but they continue to struggle around big homes they can’t afford to sell.
Families who long ago outgrown their homes not only can’t afford to move, but they can’t afford to remake to add more space. Their homes continue to deteriorate. Their kids pay school fees or save for a down payment on their first home without help from mom and dad’s bank.
Like ghosts in the night, the under-equipped upset the balance between supply and demand. Are you wondering why there are so many entry level homes in your market? Are Limited Stocks Driving Prices Up? Are stocks low because too many houses are owned by under-equipped people who cannot sell?
There have always been under-equipped owners, and there always will be. By the time most new mortgages are signed, another under-equipped owner is born. Today’s silent plague is on a whole different scale. Its depressive effect will persist. It will persist until demand is strong enough to push prices up to levels that free the last prisoners serving ten years. Or it will persist until the under-equipped pay off enough principal on their mortgages to free themselves.
Steve Cook is the editor of Real Estate Economy Watch, which was recognized as one of the top two real estate news sites of 2011 by the National Association of Real Estate Editors. From 1999 to 2007, he was Vice President of Public Affairs for the National Association of Realtors and continues to provide communications consulting services. In 2006 and 2007, he was named one of the 100 Most Influential People in Real Estate.
Email Steve Cook.