Wall Street Journal
By Nick Timiraos
So-called “underwater” homeowners who owe more than their homes are worth could be holding their breath for much of the next decade.
A new study by First American CoreLogic finds that it could take until late 2015 or early 2016 for the typical underwater borrower to have positive home equity, and that homeowners in some of the nation’s hardest hit markets, such as Detroit, could be underwater until as late as 2020.
Of the 10 markets examined in the report, Atlanta, Dallas and Washington, D.C., are the first markets to return underwater homeowners back to positive equity in 2015, followed by Boston and California’s Inland Empire one year later. Pittsburgh, Las Vegas, Fort Myers, Fla., and Lancaster, Pa., aren’t projected to return to positive equity until 2019.
The study notes that even markets where fewer borrowers have negative equity could take a long time to recover “because the few borrowers that are upside down are deeply in negative equity and these are typically not high appreciation markets.”
The research, of course, makes certain assumptions about long-term home prices and how quickly borrowers will pay off their loans. As a baseline, the research uses market-specific forecasts for short-term growth, an annual 3% increase in long-term prices, and average loan balances that decrease through amortization at an annual rate of 3.3%.
Under best-case and worst-case scenarios, which use annual home-price appreciation of 5% and 1.5%, respectively, positive equity begins to return in 2013 and 2017.
The findings show just how paralyzing the negative equity problem could become for the economy over the next few years, as more homeowners are trapped in homes that they can’t sell or refinance. Certainly, delinquencies should slow down once jobs begin to return, and once home prices stabilize, fewer borrowers will be incented to walk away from homes when they can still afford to pay. But the long after-effects of negative equity is one reason that some housing analysts are worried about housing markets taking many years to return to normal.