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Positives of Negative Equity on Home Prices: CoreLogic

Declines in the share of REO properties and in the months' supply of unsold inventory are all leading to a revival in home prices, and these drops are being driven, in part, by negative equity, ""CoreLogic"":http://www.corelogic.com/ concluded in a report.

Basing the finding of rising home prices on its most recent home price index, CoreLogic reported that prices gained by 1.1 percent in April compared to the year before and by 2.2 percent from the month before in March. These were the price increases when including distressed sales. When analyzing prices after excluding distressed sales, prices increased by 1.9 percent year-over-year and by 2.6 percent month-over-month.


One factor helping boost prices is the decreasing months' supply of homes, which dropped to 6.5 months in April, the lowest level in more than five years, according to CoreLogic.


While a lower supply during a time of growing demand is a positive for home prices, Sam Khater, chief economist for CoreLogic and author of the report, explained negative equity is the main reason behind the low supply, not an increase in sales.

Negative equity not only makes consumers more reluctant to buy, but it can also discourage homeowners from selling, leading to a smaller number of homes listed on the market.

Data from the analytics firm revealed that among the 50 largest markets, those with a higher share of negative equity have, on average, a lower months' supply of inventory. For example, markets with negative equity share at or greater than 50 percent have an average months' supply at 4.7 months, but markets with a less than 10 percent negative equity share have an inventory supply of 8.3 months on average.

Thus, as counterintuitive as it may seem, the high share of underwater homes is helping the market by at least keeping the supply of homes for sale low.

The impact of the deluge of underwater homes is actually helping to increase lower-prices homes, according to CoreLogic. This is because supply is tighter for lower-priced homes since negative equity is greater. In fact, over the last two months, these less pricey homes have seen an average yearly increase of 4.5 percent while higher-prices homes have increased by only about 0.6 percent.

So, despite reports of sluggish employment growth and increasing tension in the euro-zone, Khater sees reasons to expect price growth in certain markets.

""We have transitioned from pricing dynamics driven by economic weakness and high shares of distressed sales to one of restricted supply, which will likely exist for some time to come â€" reason for optimism in many hard-hit markets,"" wrote Khater.