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Viewpoint: The Problem Is Called ‘Negative Equity’

The Wall Street Journal catches up with what HW readers and industry insiders have known for some time — that we’re not looking at a subprime credit crisis any longer:

As prices fall, more homeowners are finding they owe more on their mortgages than their homes are worth. Economists call this “negative equity.” The problem with negative equity is that it gives people an incentive to walk away from their homes and their mortgages, making the debt the problem of the banks. Some homeowners did that in Texas in the 1980s. It is hard to prove it’s happening now to any large degree. But many bankers see it as a problem. Wachovia and Bank of America executives have pointed to the trend, as does Fitch Ratings. In Las Vegas, half the homes listed for sale are vacant, according to Ivy Zelman, an independent housing analyst. Many of these homes were originally bought by investors. They thought they were getting an appreciating asset and have little attachment to the homes now. It is easy to imagine how walkaways could lead to an insidious process, putting more downward pressure on prices, and in turn giving more homeowners an incentive to pack their bags and leave their keys in the mailbox for the bank.

None of this, of course, is really news — or at least it shouldn’t be. Yesterday, HW provided some additional analytic insight into the NAR’s quarterly MSA price survey that found that the population differential between the best-performing and worst-performing MSAs was skewed towards price declines by a factor of nearly ten. Price declines are now a wide-spread trend, even outside of so-called ‘bubble areas,’ meaning that the number of borrowers seeing their equity cushions disappear is increasing. The Calculated Risk blog has covered this issue for some time, with the blog’s eponymous author suggesting that if prices decline an additional 10 percent in 2008 — a number in line with most economists’ projections — the number of homeowners with no equity will rise to 10.7 million. No wonder outfits like Fitch are worried.

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3d rendering of a row of luxury townhouses along a street

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