Negative Equity Insures Downward Spiraling Logjam in Housing Prices

Author: Rob K. Blake | Date: August 12, 2008 | Filed In: Real Estate

Negative equity is reported today to have occurred in almost 30 percent of homes purchased in the last five years and 45 percent in homes bought in the last two years.

Negative Equity Explained

Negative equity occurs when the home value is lower than the mortgage balance, also referred to as being “underwater” or “upside down” in the home. Negative equity is common occurrence when home prices are dropping as rapidly as they are in today’s market, especially when coupled with the recently popular low or no down payment mortgage terms.

Even a home buyer who put 20% down on a home a few years ago, could see their home in a negative equity position if the local market dropped more than 20% since purchase. If their local dropped 25% since purchase, they are 5% “underwater” or have a 5% negative equity position in the home.

Home Owners Are Trapped

It is impossible to sell a home with a negative equity position without the seller bringing cash to the closing. Many sellers don’t have the extra cash needed, so they simply can’t sell. They are stuck in the home watching housing prices spiral even lower.

They can’t refinance a negative equity home without cash either. This cause problems if the mortgage happens to be an adjustable rate mortgage. If the home owner experiences an upward payment adjustment they can no longer afford, they come the next foreclosure victim. The foreclosure further suppresses home values for the neighborhood and housing prices drop again.

Hence we have downward spiraling jog-jam insuring home prices continue to deteriorate…just like a fighter pilot who can’t eject and can’t right the plane…the only way out is to hit the ground!

Ouch!

Here’ s a Bloomberg video explaining the details…enjoy!

Good Luck!