Nearly 10 million Americans accounting for approximately 18.8 percent of U.S. mortgages are stuck in homes worth less than their debt. Since the collapse of the housing market, these “underwater borrowers” have slowed recovery efforts by keeping their homes off the market.
The majority of underwater borrowers live in affordable homes that are the most sought after by first-time home buyers. Nationally, these homes are three times more likely to have negative equity than high value homes, according to the first quarter Zillow Negative Equity Report. Nationwide, roughly one in three affordable homes are considered underwater.
“The unfortunate reality is that housing markets look to be swimming with underwater borrowers for years to come,” Zillow Chief Economist Dr. Stan Humphries told the Wall Street Journal. “It’s hard to overstate just how much of a drag on the housing market negative equity really is, especially at the lower end of the market, which represents those homes typically most affordable for first-time buyers. Negative equity constrains inventory, which helps drive home values higher, which in turn makes those homes that are available that much less affordable.”
The Zillow report also found that 18.1 percent of mortgage holders qualified as “effectively” underwater, meaning they had equity, but the capital from selling their home is insufficient to recoup the sales costs and put down a down payment on a new property.
In Atlanta, 53.1 percent of mortgages are underwater or effectively underwater. Las Vegas has a 50.6 percent rate, and Chicago comes in at a 45 percent rate. Time reports that there were nearly two million homes for sale at the end of March, which at the current sales pace should last 5.2 months, below the six month supply that is considered healthy.
Developing a measured approach to risk management is always a difficult balance for lenders, but as the market adjusts to current rates, lenders need tools to properly manage risk, such as case management software.