Surprise turnaround in homeowner equity

WASHINGTON — With all the bad news about underwater homeowners and strategic walkaways, you might think that American homeowners' equity holdings are in the tank.

But the least publicized recent statistic on real estate is that — despite these scary reports — home equity is again on the rise.

Is that some piece of rosy propaganda put out by housing lobbyists to stimulate more homebuying? Not unless you consider Federal Reserve economists to be shills for the real-estate industry.

The Fed conducts massive ongoing research into mortgage balances and home-value changes in hundreds of local markets around the country, and reports its findings quarterly.

According to the Fed's most recent "flow of funds" survey, homeowners' net equity grew by nearly $1 trillion between the recession's nadir in the first quarter of 2009 through the third quarter. From last June 30 through Sept. 30, net equity rose by $418 billion.

That's not all that impressive compared to the quarterly increases registered during the hyperinflationary housing boom years, but it could signal something important: After three years of unprecedented shrinkage in home equity — and three years of rapid expansions in the numbers of underwater borrowers with 7 equity — there are signs that the down cycle may be shifting.

This past week, Seattle-based online real-estate valuation researcher Zillow.com released its latest quarterly numbers on negative equity in major markets.

The findings were sobering, but the study also offered some hints of modest improvements for housing.

The overall negative-equity rate among American homeowners remained flat in the fourth quarter at 21.4 percent.

But like the Fed's numbers, that ratio represented a slight decrease from the first two quarters of last year, when 22 percent and then 23 percent of owners owed more on their mortgages than the estimated market value of their real estate.

Zillow's study found that in dozens of housing markets — including Seattle, San Francisco, Washington, D.C., Los Angeles, Detroit, Miami, San Jose and Tampa-St. Petersburg — the percentage of homeowners with negative equity appears to be on the decline.

In the Seattle metropolitan area, the negative-equity percentage in the fourth-quarter 2009 was 21.9 percent. That was down 0.6 percent from the third-quarter, and down from the 24.1 percent ratio in the second-quarter.

Some of the largest declines occurred in cities hardest hit by the recession and the housing bust — Ann Arbor, Mich. (-9.0 percent), Riverside, Calif. (-5.7 percent) and Phoenix (-2.0 percent).

Florida markets that have struggled with major price devaluations also saw significant improvement in negative-equity ratios in the fourth quarter, such as Fort Myers (-5.4 percent), Miami (-5.1 percent), Naples (-4.5 percent) and Tampa-St. Petersburg (-1.4 percent).

On the other hand, Zillow's study found historically high rates of negative equity continuing to prevail in key cities. In metropolitan Las Vegas, for example, 81.3 percent of all homeowners — 256,000 households — were still underwater on their mortgages in the fourth quarter. This number is down from 82.5 percent in early 2009, but that's no consolation to the affected borrowers.

In Phoenix, 61.5 percent of borrowers were in negative territory — 2 percent lower than in the previous quarter, yet still scarily high.

Which major markets have the lowest underwater rates? As you might guess, they tend to be areas where the equity boom never quite boomed, and where toxic mortgages and fog-the-mirror underwriting by lenders were never the rage: Tulsa, Okla. (4.2 percent), Harrisburg, Pa. (5.7 percent), Binghamton, N.Y. (5.6 percent), and Peoria, Ill. (8.0 percent).

Negative-equity rates are crucial barometers of local housing markets' propensity to experience high rates of mortgage default, foreclosure and strategic walkaways. Communities with single-digit negative-equity rates tend to have lower rates of walkaways and foreclosures.

The reverse is the case in areas where large numbers of underwater homeowners see no economic rationale for continuing to send in their monthly mortgage payments on properties worth tens of thousands, even hundreds of thousands, of dollars less than the principal balance owed to the bank.

They feel they are throwing away money on albatross real estate that may take a decade or more to once again be worth what they paid for it during the boom.

Mortgage market analyst Laurie Goodman, senior managing director of Amherst Securities, recently warned lenders to be especially vigilant about borrowers in markets where negative-equity ratios are high because, in her view, they are prime candidates to walk away from their loans.

Once underwater borrowers miss just one payment on their mortgage, according to Goodman, there is a 75 to 80 percent probability they will chuck the whole deal.

Borrowers with even minimal positive equity, on the other hand, are far less likely to do the same.

Kenneth R. Harney: kenharney@earthlink.net