The housing market has improved tremendously over the past 6 years, however there are still millions of homeowners who have negative equity on their homes. A recent study conducted by RealtyTrac showed that 17 percent of U.S homes are seriously underwater, down from 26 percent a year ago. While it is encouraging to see the big drop in homes with substantial negative equity, 17 percent is still a high number. So what exactly is negative equity and how does it impact buyers, sellers and lenders?
What is negative equity?
Negative equity is a situation that arises when the asset used to secure a loan is valued less than the total loans against it. To calculate how much negative equity a home has you simply subtract the total amount of loan balances from the value of the house. For example if a house is worth $330,000 and the loans against it total $348,000 it is underwater by $18,000.
How does it impact buyers and sellers?
Negative equity on homes has a very big impact on the buying and selling in the real estate market. Buying a home in an area where several houses are underwater can help reduce the average sales price of the homes in the area. If you are buying a home that has negative equity you will have to go through the short sale process which would take much more time and have a lot of lender stipulations. Sellers are also affected by negative equity in the same ways, however, it is detrimental to their profit if other underwater homes drive down the cost of their home.
How does it impact lenders?
Lenders are severely impacted by homes with negative equity. They take large losses on homes that are underwater and go through the short sale process. They also lose potential new loans when homes don’t appraise at a high even value due to depreciated values in the area.
A depressed real estate market has a great effect on many. After the market collapse in 2008 millions of homes were substantially underwater. Many homes were worth less than half of the outstanding mortgages against them. The market has seen a rebound as home valuation has increased and the number of mortgages in default has decreased.