30% of California homeowners owed more on their mortgages in the third quarter of 2011 than their homes were worth, a condition referred to as negative equity. This consists of 2,030,292 homes statewide. [Data courtesy of Corelogic, a data analytics company.]

While still high, these numbers represent a downward trend from one year ago, when 32% of mortgages were in negative equity territory. The decline suggests that principal payments on existing mortgages rose more quickly than housing prices dropped over the last year. [For more on current pricing, see the first tuesday Market Chart, California tiered home pricing.]

An additional 4.6% of mortgages were classified as “near negative equity,” indicating that their cumulative debt was within 5% of reaching a negative equity position. Being at or near negative equity is a precarious position for homeowners, and greatly increases the likelihood of a mortgage default. Worse, negative equity homeowners cannot sell their homes without either a discount or shortsale approval from the lender — both of which are rare.[For more on the causes and effects of negative equity, see the February 2011 first tuesday article, The negative equity plague: California’s home insolvency crisis; for more information on shortsales, see the September 2011 article, How to facilitate a shortsale transaction.]

California has a higher proportion of negative equity than all but five other states. By percentage, Nevada remains by far the worst, with a full 58% of homes in negative equity territory.

first tuesday take: Negative equity reduces homeowners’ standard of living, deprives them of savings and drives many into insolvency, making them candidates for bankruptcy or strategic default.

Although homeowners may develop a strong emotional connection to their homes, they are not mathematically inept. They will often choose to abandon a property that costs more than it is worth, calculating that the benefits of default will outweigh the damage done to their credit score. An estimated 30% of all California foreclosure sales are preceded by strategic default, and the percentage is increasing.  [For more on current mortgage defaults and foreclosures, see the first tuesday Market Chart, NODs and trustee’s deeds: less depressed but still grim.]

Although the gradual decrease in negative equity shown by this data is an encouraging sign, more than a decade remains before California’s housing market can return to the debt levels of pre-recession years. Without congressional assistance to permit bankruptcy-ordered cramdowns to reduce a family’s single family residence (SFR)mortgage debt, an unacceptably high percentage of homeowners are likely to remain underwater until well into the 2020s. [For more on political resistance to measures to help homeowners, see the February 2010 first tuesday article, HR 4173 and the failed homeownership cramdown amendment.]

The prolonged period of negative equity will be extraordinarily harmful to the California economy. Homeowners’ mortgage payments — money which could be going into the economy to pay for goods and services — will instead continue to pay principal and interest (PI) on worthless debt, enriching Wall Street bankers but doing little to improve their own conditions. Until homeowners can use their money to improve their standard of living, employers will have few reasons to hire, owners will continue to lose their homes and the cycle of debt will continue.[For more on the potential benefits of loan modifications, see the September 2011 first tuesday article, Debating for the underwater and underemployed.]

Re: “Corelogic third quarter 2011 negative equity report,” from Corelogic.