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January 29, 2013 8:29 pm
House prices in areas of the US hit hardest by the property downturn have registered the sharpest increases over the past year in what some economists see as an encouraging sign for the recovery.
Policy makers at the Federal Reserve and elsewhere believe a house price and mortgage refinancing boom could result in higher-than-expected US growth in 2013. Tuesday brought further evidence that the house price recovery is picking up steam as the S&P/Case-Shiller index rose by 5.5 per cent on a year ago, its most rapid ascent since August 2006.
House price rises during the first three quarters of 2012 took 1.3m households out of negative equity, leaving 10.7m still mired in the trap, but a turnround in the hardest hit areas offers further hope.
According to data prepared for the Financial Times by CoreLogic, markets with a higher share of negative equity – houses worth less than the mortgage on them – enjoyed a faster rise in prices than the rest in 2012.
Of the 100 largest US housing markets, the 10 with the most homes in negative equity saw prices rise by an average of 9 per cent from November 2011 to November 2012, while the 10 with the least negative equity saw an average rise of just 4 per cent.
The reversal of the house price crash is transforming the prospects of households in areas such as Florida and California’s Central Valley. If they regain enough equity for a mortgage refinancing, they would be able to jump from a pre-crisis interest rate of 6 or 7 per cent to current levels of 3.5 per cent.
Households that manage to refinance will be able to consume more.
“There’s going to be a positive feedback loop that will help refinancing, help home sales and have a wealth effect,” said Sam Khater, deputy chief economist of CoreLogic, in Tysons Corner, Virginia.
For example, in the Las Vegas market, where more than 60 per cent of homes with a mortgage are worth less than it, house prices rose by more than 14 per cent over the past 12 months, according to CoreLogic.
Thousands of homeowners in negative equity are trapped in expensive mortgages because no bank wants to take on the credit risk. Crossing a trigger level, such as loan-to-value of 80 per cent, can make refinancing possible. On a $200,000 mortgage, refinancing from 6.5 per cent to today’s best rates of 3.5 per cent saves $500 a month in interest.
But Jim O’Sullivan at High Frequency Economics in New York cautioned that many homeowners are so deep in negative equity that it will take a huge house price rally to make a difference. “For people who are under water they’re just less under water,” he said, noting that banks are keeping their lending standards tight.
Mr Khater said that the house price rally might not be sustainable because in some areas “high negative equity is artificially restricting the supply of homes”, with underwater homeowners staying put because they cannot afford to sell, and foreclosures bought by private equity companies are rented out rather than sold.
That may put a cap on the recovery, as any sustained move towards higher prices brings a flood of houses on to the market.
“There are a large pool of homeowners that are still under water,” said Daren Blomquist, vice-president at housing data provider RealtyTrac.
“The question is what happens to these homeowners. Are they going to stick it out, let the lender foreclose or short sale – when homes are sold at deep discounts? This is still a concern.”
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