From the NYT:
While existing home sales are up nearly 5 percent from last year, economists say activity would likely be more brisk if it weren’t for the negative equity overhang that has lately worsened in many markets.
Completed sales on existing homes rose 4.7 percent in February compared with a year ago, reaching an annual rate of 4.88 million, according to the National Association of Realtors, a 1.2 percent increase over January. But Mark Fleming, the chief economist at First American Financial Corporation, a national provider of title insurance and settlement services, says his research tells him that home sales ought to be even higher. The labor market has improved considerably. And home prices are higher, which, though it may sound counterintuitive, have historically correlated with rising home sales, he said.
“Rising prices only crimp affordability for the first-time buyer who doesn’t yet own the asset,” Mr. Fleming said. “But the vast majority of home sales are to existing homeowners. And for existing homeowners, what changes affordability is their own income and the price of money.”
Both of these factors are running in homeowners’ favor. The problem, though, is that many are still unable to participate in the housing market because of insufficient equity.
The share of homeowners underwater has, in fact, declined dramatically from the 2011 peak of 31 percent. As of the fourth quarter of 2014, the national rate was closer to 17 percent, according to Mr. Humphries.
“A big part of that is because of robust home value appreciation in the last three-plus years,” Mr. Humphries said. But he emphasized that the decline in underwater homeowners is “now slowing as the housing cycle matures. As price gains moderate, the pace at which we work out negative equity slows down.” By the end of 2015, the share of homes with negative equity will likely still be above 15 percent, he said.
Zillow’s 2014 fourth-quarter negative equity report even shows rising negative equity levels in 21 of the top 50 housing markets, compared with the third quarter. The reason is that the bottom 10 percent of homes in these markets, where negative equity is highly concentrated, are declining in value, Mr. Humphries said.
Homeowners in the bottom one-third of housing stock by price are three times as likely to be underwater than homeowners in the top third, Mr. Humphries said. What’s more, the Zillow report found, they are also far more likely to be deeply underwater, or owing at least twice what their home is worth.
In the New York area, 13 percent of owner-occupied homes had a mortgage in negative equity. These homeowners were underwater by an average of $125,550, compared with $67,797 nationally.