Underwater Mortgages Keeping Housing Market Afloat?

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underwater mortgages

The more than 20 percent of U.S. homeowners stuck with “underwater” mortgages may be in a rough spot — but, believe it or not, that may be giving a boost to the housing market.

Though negative equity is forcing millions to stay put in homes that are worth less than their mortgages, it means fewer properties are going up for sale — and that’s driving up the prices of homes that are already on the market, according to a recent report by the analytics firm CoreLogic. The price increases could help spark a recovery by luring in more homebuyers keen on purchasing assets likely to appreciate in value, experts say.

“One of the reasons that inventory has fallen is because negative equity means that people aren’t putting their homes on the market because they’re underwater,” said Jed Kolko, chief economist of listing service Trulia. “Buyers are chasing a smaller number of homes and, therefore, are more likely to bid up prices.”

Of course, that’s not much consolation for Christy Mannering (pictured above with her family).

She’s been dying to move from her home in Bear, Del., since November 2007, when it was robbed.

“I was immediately like, ‘I want to get out of this neighborhood,’ ” said Mannering, who is a Web developer at the University of Delaware and also runs the blog Scrink.com.

But nearly five years later — and after the housing bust demolished national home prices — she’s still there, stuck in a mortgage that now costs $25,000 more than her home, and forced to continue living in a neighborhood that she considers dangerous.

Still, Mannering’s quandary, bizarrely, may spell hope for the real estate market in the short term.

“Paradoxically, as the flow of REOs [bank-owned properties] has slowed over the last 18 months, negative equity has become a positive force in real estate markets by restricting supply in the face of increasing demand,” wrote CoreLogic’s Sam Khater in the firm’s June MarketPulse report.

There’s also another market trend at play: Data show that fewer bank-owned homes are flowing onto the market, as lenders proceed cautiously with foreclosures in the wake of the “robo-signing” settlement and ramp up efforts to resolve distressed mortgages through loan modifications and short sales.

Both market influences have acted together to push down for-sale home supply to its lowest level since the housing bust, the CoreLogic report said.

That’s played a role in fueling a recent price recovery, experts say. CoreLogic’s Home Price Index, which was in line with some other indices, showed that home prices rose consecutively in March and April, something that “will rebuild confidence in many local markets,” Kolko said.

Underwater Mortgages Housing Market

However, Kolko warned that negative equity is by no means a boon to the market.

The difference between a market recovery nursed by price increases that are artificially propped up by a large number of underwater homes versus one that kicks into gear only after absorbing a pent-up supply of homes (the homes currently trapped by underwater mortgages) is “like whether you take a Band-Aid off quickly or slowly,” he said.

Negative equity is “not permanently reducing inventory,” he said. When homeowners are finally able to sell their properties for more, a larger number of them might flow onto the market, which would depress home values.

Mannering couldn’t care less about the effect of her family’s underwater mortgage on home prices — she just wants to come up for air. She has pursued a loan modification tirelessly, in an effort to give her family some financial breathing room.

“Currently, we are with Bank of America,” she said. “At first, we spoke to them, and they told us to call back in 60 to 90 days because they were too busy with other customers. We also spoke to someone there who told us to start missing payments and look into modifying our home-to-loan value ratio — but, again, that ruins your credit.”

Her fingers crossed, Mannering is on the hunt for lenders who may allow her to refinance under the Home Affordable Refinance Program, which allows some homeowners who are current on their mortgages to refinance Fannie Mae- or Freddie Mac-guaranteed loans to lower rates. But she and her husband must grapple with whether lowering their mortgage rate by a percentage point or two is worth the $5,000 in closing costs.

“Our situation may be helping other people in the market,” she said. “But it’s not helping us, and I have a funny feeling there is a high percentage of people in the very same sinking boat as we are in.”

See also:
Should Underwater Homeowners Just Walk Away?

Occupy D.C. Protesters Fail to Block Eviction

Extreme Home Makeovers: From Sorry to Stunning

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Find out how to calculate mortgage payments.
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