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Here’s what Home Price Growth and Declining Negative Equity Mean for the Housing Market in 2016

underwater-twoThe number of residential homes with negative equity, also referred to as being “underwater” or “upside down,” has been steadily declining in the last few years while the number of homes with equity has been on the rise.

That is a combination that bodes well not just for housing, but for the overall economy, according to CoreLogic’s Q3 2015 Negative Equity Report released on Tuesday. The report found that 256,000 residential properties regained equity in the third quarter, bringing the nationwide total to about 46.3 million, which calculates to approximately 92 percent of all homes with an outstanding mortgage.

“Homeowner equity is the largest source of wealth for many Americans,” said Anand Nallathambi, president and CEO of CoreLogic. “The rise in home prices, expected to be at least 5 percent in 2016, will continue to build wealth and confidence across America. As this process continues, it will provide support for the housing market and the broader economy throughout next year.”

The number of residential properties with a mortgage that had negative equity as of the end of Q3 was at 4.1 million, or about 8 percent of all homes nationwide. This represented a decline of nearly 5 percent from Q2 2015 and nearly 21 percent from Q3 of 2014, when 5.2 million homes (10.4 percent) had negative equity, according to CoreLogic. The aggregate value of the negative equity in those 4.1 million homes in Q3 was $301 billion, nearly a 12 percent decline from Q3 2014 when it was reported to be $341 billion.

12-15 CoreLogic Graph 1Though the vast majority of the 50 million residential properties in the country with a mortgage have equity, a substantial portion of them are “under-equitied,” or have less than 20 percent equity. Nearly 9 million, or 17.6 percent, of residential properties are under-equitied, and 1.1 million, or 2.2 percent, have less than 5 percent equity—what is referred to as having “near-negative equity.” Underwriting constraints might make it difficult for near-negative equity borrowers to either refinance an existing home or to sell their home and buy another one. Since a drop in home value or home prices can result in a borrower being underwater, near-negative equity borrowers are considered at risk of becoming underwater should home prices decline.

Of the more than 50 million residential properties with a mortgage, approximately 8.9 million, or 17.6 percent, have less than 20 percent equity (referred to as "under-equitied") and 1.1 million, or 2.2 percent, have less than 5 percent equity (referred to as near-negative equity). Borrowers who are under-equitied may have a difficult time refinancing their existing homes or obtaining new financing to sell and buy another home due to underwriting constraints. Borrowers with near-negative equity are considered at risk of moving into negative equity if home prices fall. Recent home price appreciation has been one of the drivers of the increase in the number of homeowners with equity, according to CoreLogic.

“Home price growth continued to lift borrower equity positions and increase the number of borrowers with sufficient equity to participate in the mortgage market,” said Frank Nothaft, Chief Economist for CoreLogic. “In Q3 2015 there were 37.5 million borrowers with at least 20 percent equity, up 7 percent from 35 million in Q3 2014. In the last three years, borrowers with at least 20 percent equity have increased by 11 million, a substantial uptick that is driving rapid growth in home equity originations.”

Click here to view the complete report.

12-15 CoreLogic Graph 2

About Author: Brian Honea

Brian Honea's writing and editing career spans nearly two decades across many forms of media. He served as sports editor for two suburban newspaper chains in the DFW area and has freelanced for such publications as the Yahoo! Contributor Network, Dallas Home Improvement magazine, and the Dallas Morning News. He has written four non-fiction sports books, the latest of which, The Life of Coach Chuck Curtis, was published by the TCU Press in December 2014. A lifelong Texan, Brian received his master's degree from Amberton University in Garland.

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