US Housing Market: Bubble-States Awash In Negative-Equity

One of my primary arguments that the foreclosure crisis has a long way to go has to do with to the massive amount of negative equity in the hardest hit, most populated ‘bubble states’. The very states that added so much to the great wealth effect.

Negative-equity is FICO-score and loan type blind.  In the new era of ‘my house is my largest investment’, most everyone feels the same way about paying into a massively depreciated asset. This is even more the case when the payment increases on an exotic-type loan such as a 2/28, Pay Option ARM or even a Prime 5/1 Interest Only.

In the hardest hit states, those not in a negative equity position have very little equity remaining given the current data. This is why the all-important move-up buyers are non-existent and over half of the homes sold are from the foreclosure stock.

With lending tightened to such a large degree, sizable down payments are now required to attain the best financing. Ideally, a buyer wants to extract this and all other purchase expenses through the sale of the property.  However, with the median Loan-to-Value’s in the bubble states being so high there is not enough left over from the proceeds to pay a real estate agent, put a down payment on the new property and cover all of the other costs associated with moving.  People are stuck in their properties unable to move or refinance.

This recent data from Loan Performance below corroborates my research. The first chart shows the amount of negative equity in each state.  In addition, I added the top 10 foreclosure states per Realty Trac in the third column. With the exception of Illinois and Indiana, the top 10 negative equity states are the same as the top 10 foreclosures states. Nevada and Michigan top the list…a solution there may be bulldozers and gasoline.

This second chart shows the median Loan-to-Value in each state.  The top negative-equity states have the highest median Loan-to-Value ratio (littlest amount of equity).  These housing markets within these states are frozen, as the majority home owners are unable to freely transact. Note, that this estimate of equity is based upon Loan Performance’s proprietary House Price Index, which may or may not be accurate - home price indexing has been an impossible task for everyone to date.

The charts above scream loudly about what WILL happen, as loans now considered ‘high-grade’ or ‘Prime’ begin to adjust or even borrowers in 30-year fixed rate loans who put 20% down but bought at the wrong time find it a financially prudent move to de-leverage and walk away.  We are seeing this happen today in ever increasing numbers.

Source: Inman News: Nearly 10 million homes upside down

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