How long will negative equity last?

March 25, 2010

First American CoreLogic tries to answer the question for ten housing markets with the following chart (for an enlarged chart, see here):

neg equity estimate

So, for instance, the average Bostonian homeowner (the green triangle) will again reach positive equity in 2017. Here is a quote from FACL’s detailed press release.

Figure 1 projects the amount of negative equity using First American CoreLogic short-term forecasts and a baseline view of long-term price trends nationally through 2020. It also takes into account the amortization assumptions described below for ten markets.

For the typical underwater borrower in the U.S. it will take until late 2015 or early 2016 for negative equity to disappear.

In certain markets, it will take another five to 10 years or even longer to return to positive equity. For example, Detroit is not projected to recover even by 2020, because of its depressed economy.

In markets with low shares of negative equity, the recovery time will still be long because the few borrowers that are upside down are deeply in negative equity and these are typically not high appreciation markets. Although house price appreciation will, over time, offset negative equity, amortization (the paying down of loan balances) will in most cases be a more significant remedy to negative equity.

Over the next 10 years, the average loan balance will decrease by an annual rate of 3.3%; meanwhile home price are expected to increase at a 3% annual rate over the next decade.

I think 3% annual house price increase may be aggressive. If you think the Fed can successfully reflate the economy, that may be possible. But the sheer level of debt we have to work off probably means debt deflation will keep a lid on house prices for many years.

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That doesn’t even address “effective negative equity” as Hanson put it recently: being able to sell your house, cover the debt, the agent fees, and the costs of buying another house.

Also, it seems that they’ve assumed that former high price growth areas will return to being high price growth areas despite what we would HOPE is a lack of exotic financing.

Finally, I surprised at the negative equity for Dallas in this. Avg home prices haven’t fallen very much in the market, but the level of negative equity on the chart suggests a 10% or more price drop (and everyone starting out with 100% financing). Seems sketchy.

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