Negative Equity Declines: Is It Good News?

Looking for a silver lining in all the gloom-day real estate news of the day? Corelogic released its negative equity report for 2nd Quarter 2010. Perusing the headline and content of the report, it is promising: 11 million (23%) homes of all residential homes secured by a mortgage were underwater at the end 2Q 2010, compared to 11.2 (24%) at the end of 1Q 2010. Since the report was released, I have heard a number of real estate agents touting this stat as an indicator that an economic recovery is well under way and market stabilization is forthcoming.

For those who did not take the time to read the entire data, let me be succinct in my point: This is NOT a result of market stabilization or value increases! The decline is primarily caused by properties going into foreclosure. So is that good news to the homeowners who (although underwater) have continued to meet their financial obligations, at times by great personal sacrifice? Hardly. As these foreclosures are sold at under-market value, the value of other homes in the area will also be negatively impacted. Obviously distressed properties must be absorbed by the market before long-term growth can commence, but when did basing opinions (which are then told to consumers/clients) on partial data become fashionable?

To briefly recap the report, 5 states are the hardest hit by negative equity: Nevada (68% of properties with mortgages are ‘underwater’), followed by Arizona (50%), Florida (46%), Michigan (38%), and California (33%). Of the metro areas (with at least 50,000 mortgages) analyzed Las Vegas suffers the most, with homeowners with negative equity at 72.8% and a whooping Loan-to-Value ratio of 131%. Other metro areas worth noting: Stockton, CA (62.4%), Modesto, CA (59%), Phoenix, AZ (56%), Reno-Sparks, NV (54.6%), Port St. Lucie, FL (54%), and Orlando, FL (53.9%).

I’m an optimistic person by nature, but I’m also very realistic and base my opinion on FACTS. Yes, the market will recover at some point in the future but until it does, I know here we can talk real estate with some real perspective: the BiggerPockets Blog.

Note By BiggerPockets: These are opinions written by the author and do not necessarily represent the opinions of BiggerPockets.