CoreLogic: Fewer Underwater Mortgages in 3Q. Foreclosure Sales Drove Reduction

"Negative equity is a primary factor holding back the housing market and broader economy," Mark Fleming, chief economist with CoreLogic said Monday as his company released third quarter data showing continued improvement in the number of underwater mortgages.  Fleming however warned that price declines are apparently accelerating which could put a stop to or reverse the recent positive trends in equity.

CoreLogic reported that 10.8 million or 22.5 percent of all residential properties with mortgages had negative equity at the end of the third quarter compared to 11.0 million or 23 percent at the end of the second quarter. This is the third consecutive quarter in which negative equity declined. The company, however, attributed the most recent decrease to foreclosures of underwater properties rather than on an increase in home values.  The aggregate level of negative equity declined to $744 in the third quarter compared to $800 billion at the end of 2009.

An additional 2.4 million properties or 5 percent of the total mortgages were termed "near-negative" because their owners had less than 5 percent equity.

Negative equity remains concentrated in five states.  In Nevada, which has led the nation in foreclosures for nearly two years, 67 percent of mortgaged properties were "upside down" while in Arizona and Florida, two other states that continue to be plagued with foreclosures, underwater properties accounted for 49 and 46 percent of all mortgages respectively.  In Michigan 38 percent of properties were in negative territory and in California 32 percent.  Alaska, about which little is usually heard in such studies, had the largest improvement in negative equity with a drop of 1.8 percent.  The other states showing the most improvement were also the states that have been hardest hit; Nevada improved by 1.6 percent, Arizona's negative equity dropped 1.4 percent, California 1.2 percent and Florida 0.9 percent.

In contrast to states like Nevada and Arizona, seven states have negative equity in single digits; Oklahoma has the lowest negative equity at 6 percent followed by New York at 7 percent and Pennsylvania and North Dakota tied at 7.4 percent.

Not all homeowners are upside down.  The Northeast is a particularly bright spot with more than half of New York residents having 50 percent or more equity in their homes followed by Hawaii at 43 percent, Massachusetts, 40 percent; Connecticut, 39 percent; and Rhode Island 40 percent.  Rhode Island displays what the report calls a "barbell" distribution, appearing among the top 15 states for both negative equity and for homeowners with more than 50 percent positive equity.  Several other states including Massachusetts and New Jersey display the same barbell effect.

The report presents a rather curious scenario under which it postulates that underwater homeowners are not truly homeowners because their lack of equity means they are less likely to maintain and improve their property and are more likely to behave like renters.  The Census says there was a 66.9 percent homeownership rate in the third quarter, a decrease from the peak figure of 69.2 percent in Q4 2004.  CoreLogic uses its premise to reduce the official homeownership rate to an effective rate of 62.4 percent in 3Q by removing all homeowners with severely negative equity, i.e. over 25 percent.  This reduces the "official" rate by 4.5 percentage points.  If all negative equity properties are removed from homeownership statistics, the effective rate becomes 56.6 percent - over 10 percent lower than the official rate.

CoreLogic's database includes 48 million properties with a mortgage, about 85 percent of the national total.  State level data does not include five states (Louisiana, Maine, Mississippi, South Dakota, Vermont, and Wyoming) because of the small numbers of mortgage properties.