Large numbers of underwater homeowners in California are hampering a widespread economic recovery, per Zillow. Now, in 10% of Southern California cities, one out of five homeowners with a mortgage owes double the value of their home.
This ratio varies by location, as nearly one in three homeowners with a mortgage in Los Angeles County and greater than one in two borrowers in the Inland Empire owe more on a home loan than their property is worth. Data indicates that cities furthest from major job centers are the most underwater, with over 60% of underwater loans being from areas in the high desert, such as Palmdale and Lancaster, as well as Inland Empire locations, including Hemet and San Bernardino.
Such high ratios of underwater homes originally led experts to predict that large numbers of homeowners would walk away from their homes in order to prevent paying more than properties are worth. This prediction has not yet been realized, however, as data shows that those borrowers with higher initial down payments on homes were less likely to abandon properties, even if they could not afford to sell their homes to pay off their mortgages.
Still, Zillow predicts strong signs of an emerging recovery in sales growth for 2012, while noting that an economic recovery will continue to be complex. An increased confidence in economic improvement would be beneficial to real estate, resulting in a shift towards more move-up buyers with equity in their homes, per Housingecon.com.
first tuesday take
Zillow’s prediction of strong sales growth this year isn’t grounded in reality. With the number of California’s negative equity homeowners having grown substantially as a result of the recent financial crisis, the state is now in a condition of stunted migratory lockdown.
Preventing homeowners from leaving their homes, negative equity is one of the leading contributors to the large decline in both interstate and intrastate migration.
Thus, homeowners are increasingly finding themselves stuck paying for black hole assets, rather than being able to sell and move on to better jobs and financial situations, thereby pressing the economy onward into recovery. Brokers and agents have the duty to inform negative equity homeowners they have long-term alternatives to free themselves of their black hole assets: shortsale or strategic default. They save cash, and later return to buy a home – when the time is right for buyer-occupants.
Related article:
Migratory lockdown: underwater homeowners confined
Still, going forward, a mandated 20% down payment is necessary to protect homebuyers from future equity losses once they purchase another home. With the Consumer Financial Protection Bureau (CFPB) deadline to formulate a definition for the qualified residential mortgage (QRM) fast approaching for the summer of 2012, a 20% down payment requirement may soon become a reality. However, with prices currently estimated to be 10% to 15% above the historical mean price, an eventual price drop will occur when the market finally returns to equilibrium.
Related article:
The homeowner debt debate
Yes, we know a mini-bubble in sales volume and pricing is passing through as we write. But it is produced by massive speculator intervention. Most will soon forget this current event as they have forgotten the volume and price surge at the end of 2009 brought on by state and federal stimulus.
For prospective buyer-occupants – users – of residential real estate, saving for a 20% downpayment now will be imperative to protect against an almost immediate loss in equity as prices continue to slip through 2013, and likely to continue into 2015. Although not the best for agents and brokers right now (and devastating for speculators), this savings accumulation will take some time.
Save now, put 20% down when you have it, and hold the property for at least ten years. Your investment would be as safe as if it had been stored in a savings account (if not slightly better).
Related article:
Qualified residential mortgages and the 20% down payment: no fear
Re: Negative equity remains a drag on the housing market from Los Angeles Times
Rwolf
Liberals have long opposed the Individual Mandate, which was a Republican proposal going back to the 1990s. So, during the writing of ACA the IRS is (twice) forbidden from levying of property (money) for failure to carry health insurance. Nor may IRS pursue criminal charges. Without any enforcement mechanism the “fine” is essentially voluntary..
Most families and individuals won’t notice any difference whatsoever as, they already have insurance. The act gets 30-odd million uninsured Americans covered, leaving roughly 25 million still out in the cold.
Jobs will dictate the market in real estate, pure and simple. Yeah, excess inventory etc. etc. but demand fueled by a decrease in the unemployment rate will tell the tale.
Don’t see housing market improving by 2018.
In 2014 Americans will be forced to purchase expensive health insurance under Obamacare or pay fines. The annual costs of forced health insurance will disqualify millions of Middle Class Americans from saving a 20% down payment or qualifying for home mortgage. Millions of current homeowners will not be able to pay both the annual costs of forced health insurance, or penalties for not purchasing health insurance, and their home mortgage. Home buyers qualified in 2012 to buy a home will be locked out in 2014. Beginning in 2014 home buyers to offset the costs of forced annual health insurance or penalties will have to make low-ball offers on houses. That will further hinder home prices moving upward.