Being deeply underwater means the borrowers owe at least 25% more on their mortgage than the property is worth. This is a significant improvement on last January when 10.9 million properties or 26% of all mortgaged homes fell into this category. This turnaround will have been helped a lot by average home prices in the US having increased by nearly 14% in the year ending October 2013.
This increase has meant many homes are worth thousands of dollars more and typically equates to fewer foreclosures. Most foreclosures will be due to a mortgage being underwater combined with another factor such as a major illness or job loss. Being significantly underwater can mean that homeowners feel little motivation to try to pay down the loan, especially when money is tight. It also means that homeowners do not have this financial asset to rely on if things become bad financially.
Being in negative equity also makes it significantly more difficult to sell the property as borrowers usually have to consider a short sale which has to be approved by the lender. If the lender fails to approve the short sale then the property could end up in foreclosure. The article in CNN Money.com points out that even though fewer people have negative equity this doesn't necessarily mean that the foreclosure crisis is over.
Experts have pointed out there are still millions of homeowners who have such a large amount of negative equity that it will take many years for this to turn positive. There is the risk about remaining in negative equity for longer periods of time as it makes it more likely that foreclosure will happen at some point because at times this might seem like the easiest option.
Last month the states with the highest percentage of homeowners with negative equity were Michigan at 31%, Illinois at 32%, Florida at 34% and Nevada at 38%. The major areas where homeowners are still struggling to return to negative equity include Chicago, Miami, Tampa, Detroit, Orlando and Las Vegas. In contrast the number of people who are considered to be equity rich grew significantly at the end of last year. These are homeowners who have at least 50% equity in their property and figures increased to 9.1 million which equates to 18% of all homes with mortgages. In comparison 7.4 million homeowners or 16% of homes with mortgages fell into this category just three months earlier.