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Negative Equity in the United States

An estimated 23 percent of Americans owe more on their mortgages than their homes are worth, or have “negative equity,” according to CoreLogic. HUD’s Office of Policy Development and Research recently published a study in which George Carter, survey statistician of the U.S. Census Bureau, used longitudinal data from the American Housing Survey (AHS) to assess how negative equity rates changed between 1997 and 2009, a period that encompasses the most recent housing boom and bust. The study analyzed trends in (and the persistence of) negative equity and estimated the prevalence of distressed sales for owner-occupied homes with one or more mortgages.

Mortgages with negative equity – also known as “under water” or “upside down” mortgages – have myriad consequences for both households and communities. Although the most obvious effect is that wealth accumulation and financial freedom are restricted, underwater mortgages also hamper people’s ability to relocate when homeowners must wait for the market to improve before making a move. Other homeowners default on their mortgages because of income decline, unemployment, divorce, or death, or as a desperate strategy to escape an unprofitable financial situation. Mortgage defaults also depress home prices across a community, resulting in even more homes saddled with negative equity and triggering a destructive economic cycle.

Home Values, Mortgages, and Negative Equity

Self-reported home values in the AHS from 1997 to 2009 followed a pattern similar to that shown in the Case-Shiller 10-City Composite House Price Index, in which home values rose steadily from 1997 to 2007 and declined from 2007 to 2009. AHS data indicate that median home values grew from $108,000 in 1997 to about $200,000 in 2007, and then dropped to $185,000 in 2009. At the same time, from 1997 to 2009, the median size of home loans increased —from $52,867 to $106,917—along with a rise in the proportion of homes that carried more than one mortgage. As mortgage debt grew and home values declined, the amount people owed on their mortgages in proportion to their homes’ worth (loan-to-value ratio) increased. By 2009, about one-third of homeowners had loan-to-value ratios of 80 percent or higher. Research shows that people with loan-to-value ratios above 80 percent are much more likely to default.

According to the AHS data, 11.59 percent of homeowners were underwater on their mortgages by 2009, an all-time high during the period under review. Adjusting for distortions in homeowners’ self-reported home values brings that figure to 16.40 percent. Differences between this and CoreLogic’s estimate (23%) are attributable to study methods and to the fact that the AHS only reviews owner-occupied homes whereas CoreLogic included vacant housing in its analysis.

Characteristics of Borrowers, Loans, and Properties with Negative Equity

Between 1997 and 2009, the number of homes with negative equity increased among all demographic groups and housing types (except manufactured and mobile homes, which are unique in financing and appreciation). Still, education, race, and other variables appear to influence the likelihood of owning a home with negative equity. By 2009, Carter found that:
• 20.5 percent of Hispanics, 14.74 percent of blacks, 13.62 percent of Asians, and 11.12 percent of whites had negative equity in their homes;
• People with less than a high school education were more likely to be under water on their mortgages than those with college degrees or more education;
• Younger homeowners were more likely to incur negative equity; 18.92 percent of people under 35— the greatest proportion of any age group – had negative equity; and
• Married homeowners were less likely to have homes with negative equity than their single counterparts.

Property and Mortgage Characteristics

Carter also analyzed the data by region, type of mortgages, housing type, and unit construction date. By 2009, properties in the West and Midwest were more likely to be underwater than those in the Northeast. People with adjustable-rate mortgages and mortgages with higher interest rates were likelier to have negative equity than owners with fixed-rate mortgages or interest rates below five percent. Manufactured and mobile homes were more likely to have negative equity than any other building type for every year of the study except 1997. By 2009, homes built between 2005 and 2007 — the height of the housing boom — were more likely to have negative equity than units built before or after that period.

Finally, Carter examined trends in the persistence of negative equity by property and estimated the prevalence of distressed sales. Nearly 40 percent of homes underwater in 2007 remained so in 2009 — a larger proportion than at any other time during the study. About 1 out of 5 (20.9%) of homes sold between 2007 and 2009 were distressed sales, in which the value of the home’s purchase price was less than the mortgage owed on it in the previous year.

Negative Equity Persistence and Distressed Sales

Years % units under water at first survey year that are under water 2 years later a

% of sales distressed

2 years later b
2007 and 2009 38.85 20.97
2005 and 2007 21.78 11.64
2003 and 2005 26.80 11.21
2001 and 2003 23.44 13.77
1999 and 2001 20.21 13.12
1997 and 1999 28.21 12.83

a Weighted percentages for owner-occupied units with at least one regular mortgage or lump-sum home equity loan.

b Owner-occupied units with at least one regular mortgage or lump-sum home equity loan in both years. Not included: vacant units, usual residence elsewhere units, units owned free and clear two years later. Source: Exhibits 5, 6 in George R. Carter III, “Housing Units With Negative Equity, 1997 to 2009,” Cityscape 14:1 (2012), 161–2.