Weak Year-end Home Values Increase Underwater Numbers

Even though the number of underwater homes increased seasonally in the fourth quarter of 2014, CoreLogic reports that 1.2 million borrowers regained equity in their homes during the year.  At year's end approximately 44.5 million homeowners or 89 percent of those with a mortgage had some equity in their homes compared to 6.6 million homes, or 13.4 percent, reported for Q4 2013.  The 1.2 million decrease in the numbers represents a change of -18.9 percent.  Borrower equity increased during the year by $656 billion.

From Quarter 3 to Quarter 4 approximately 172,000 homes slipped from positive to negative equity bringing the total number of mortgaged homes that were underwater to 5.4 million or 10.8 percent of the total.  This was an increase of 3.3 percent from the 5.2 million homes or 10.8 percent of mortgaged property that lacked equity in the third quarter. 

Frank Nothaft, CoreLogic's Chief Economist said, "The share of home owners that had negative equity increased slightly in the fourth quarter of 2014, reflecting the typical weakness in home values during the final quarter of the year.  Our CoreLogic HPI dipped 0.7 percent from September to December, and the percent of owners 'underwater' increased to 10.8 percent. However, from December-to-December, the CoreLogic index was up 4.8 percent, and the negative equity share fell by 2.6 percentage points."

Across the universe of underwater homes the national aggregate value of negative equity was put at $348.8 billion at the end of the fourth quarter, an increase of approximately $7 billion from $341.8 billion in Quarter 3.  On a year-over- year basis, however, the value of negative equity declined overall from $403 billion in Q4 2013, representing a decrease of 13.4 percent in 12 months.

Of those homes in positive territory an estimated 10 million, or 20 percent, have less than 20-percent equity (referred to as "under-equitied") and 1.4 million of those have less than 5-percent equity (referred to as near-negative equity). Borrowers who are "under-equitied" may have a more difficult time refinancing their existing homes or obtaining new financing to sell and buy another home due to underwriting constraints. Borrowers with near-negative equity are at risk of falling into negative equity if home prices decrease.  In contrast, if home prices rose by as little as 5 percent, an additional 1 million home owners now in negative equity would regain equity.

"Negative equity continued to be a serious issue for the housing market and the U.S. economy at the end of 2014 with 5.4 million homeowners still 'underwater'," said Anand Nallathambi, president and CEO of CoreLogic. "We expect the situation to improve over the course of 2015. We project that the CoreLogic Home Price Index will rise 5 percent in 2015, which will lift about 1 million homeowners out of negative equity."

The highest percentage of negative equity continues to be in Nevada at 24.2 percent of all mortgaged properties followed by Florida (23.2 percent); Arizona (18.7 percent); Illinois (16.2 percent) and Rhode Island (15.8 percent). These top five states combined account for 31.7 percent of negative equity in the United States.  Texas had the highest share of homes with equity at 97.2 percent closely followed by Montana at 97.0 percent.  Other states with high levels were Alaska (97.2 percent), Hawaii (96.3 percent) and North Dakota (96.2 percent).

The bulk of home equity among mortgaged properties is concentrated at the high end of the housing market. For example, 94 percent of homes valued at greater than $200,000 have equity compared with 84 percent of homes valued at less than $200,000.

Approximately 3.2 million underwater borrowers hold first liens without home equity loans.  They account for $185 billion of the $349 billion in negative equity.  The average mortgage balance for this group of borrowers is $228,000 and their average underwater amount is $57,000.  Approximately 2.1 million underwater borrowers hold both first and second liens accounting for $164 billion, or 47 percent of the total.  The average mortgage balance for this group of borrowers is $295,000 and they are underwater an average of $77,000.