For millions of Americans still stuck in homes with mortgages bigger that the house is worth, the long slog back to dry land is getting longer.
Nationwide, plummeting prices from the housing collapse in 2007 left more than a quarter of all homeowners with a mortgage owing more than their home was worth. Now, the recovery in home prices in many parts of the country has helped lift some underwater homeowners back above water.
Nationwide, some 19 percent of all “equity-rich” homeowners with a mortgage owed half or less of their home’s value in the first quarter, up a percentage point from the fourth quarter of 2013. Those high-equity properties are concentrated in metro areas like San Jose, Calif., (where 39 percent of homeowners have more than 50 percent equity), Honolulu (35 percent), San Francisco (35 percent), Poughkeepsie, N.Y., (34 percent), and Los Angeles (32 percent).
In past economic recoveries, rising home equity has boosted confidence and spending. That spillover effect is beginning to show up in a rise in new building permits, according to Blomquist.
“Homeowners who may have deferred maintenance or remodeling may say, ‘I have all this equity; now I feel confident enough to redo the kitchen or build that extra room,” he said. “That will trickle down to jobs and more money in the economy.”
The recovery in home prices isn’t the only path out of underwater status: Millions of these homeowners may still lose their home to a short sale, in which the lender agrees to let the homeowner sell the property for less than the outstanding debt.
But that option is less common, said Blomquist. As lenders watch home prices recover, they’re less willing to take a loss and more inclined to wait for the property to appreciate and foreclose if the homeowner is behind on their payments.
And the deeper underwater, the more likely the lender will take back the property in foreclose. Homes that are seriously underwater — the amount owed is at least 25 percent higher than the home’s value—are nearly three times as likely to be in foreclosure, according to RealtyTrac’s data.