Majority of home owners remain above water as prices continue to increase amid the global recession
The coronavirus pandemic has yet to bring down US home prices, which is good news for homeowners who wants to see their home equity continue to grow in the first quarter of 2020.
Data from the CoreLogic Home Equity Report showed that the annual home appreciation rate rose by 6.5%, representing a cumulative gain of $590 billion for homeowners with mortgages. As the coronavirus outbreak put pressure on homeowners' finances, many were left scrambling to cover mortgage payments. However, steady home price growth added to borrower equity through March.
Negative equity, also referred to as being underwater or upside down, applies to borrowers who owe more on their mortgages than their homes are worth. Quarter over quarter, the total number of mortgage loans in negative equity dropped by 3.1% to 1.8 million homes, or 3.4% of all mortgaged properties. Year over year, the figure was down by 16% to 2.2 million homes, or 4.1% of all mortgaged properties in negative equity.
According to the report, because home equity and home prices are connected, the number of borrowers with near-negative equity is most likely to move out of or into negative equity as prices shift. For example, in Q1 2020, if home prices increase by 5%, 310,000 homes would regain equity. But if home prices decline by 5%, 420,000 would fall underwater.
“The pandemic recession will likely lead to price declines in many areas during the next year and weaken home equity gains,” said CoreLogic Chief Economist Frank Nothaft. “However, price declines will be far less than those experienced during the Great Recession, when the national CoreLogic Home Price Index fell 33% peak-to-trough. Our latest forecast shows the national index to have a peak-to-trough decline of 1.5%.”
Since the Great Recession, the equity position of home owners has positively changed as a result of consistent home price increases in the past eight years. The share of negative equity in Q1 2020 was far below the post-recession levels of 25.9% (12.1 million underwater properties) in Q1 2010, down to 3.4% (1.8 million homes). Borrowers have seen an aggregate increase of $6.2% trillion in home equity since the first quarter of 2010, and the average home owner has gained around $106,100 in equity.
But there's a massive difference between the Great Recession and the COVID-19 economic crisis, CoreLogic CEO Frank Martell said.
"Many home owners will experience a recession during their lifetime, and it is reasonable to compare the current recession to those in the past,” Martell said. “The comparison is not apples to apples — every recession is different. Primary drivers of the Great Recession were an overbuilt housing stock, risky mortgages, and the collapse of home prices, creating a massive increase in negative equity that proved difficult to recover from. Today’s housing environment has low vacancy and delinquency rates and a large home equity cushion. While the CoreLogic HPI forecasts a decline in home prices in the coming year, we can also expect the majority of home owners to remain above water.”