The Other Half Has a Longer Road to Healing
CoreLogic reports that home prices rose 8.8 percent in 2012 and 11 percent in 2013 nationwide. This means, among other things, that negative equity must have fallen significantly over the last several quarters. From the fourth quarter of 2011 through the fourth quarter 2013, negative equity did in fact fall by 12 percentage points, from 25 percent to 13 percent, but the question that still remains is: when will the average underwater borrower finally reach parity?
To answer this, we chose to pursue the same methodology as used in a 2010 CoreLogic analysis addressing the very same question. We have expanded the geographies used in the original research while updating a few of the underlying assumptions in order to forecast negative equity changes for the next five years. Values from the CoreLogic Home Price Index (HPI) forecast at the Core Based Statistical Area (CBSA) level were used to project house prices out five years in individual markets. The forecast was then applied to the average amount of equity held by a typical underwater borrower in that particular market to estimate home price values through 2019. In addition, to forecast the decrease in the average amount of unpaid balance (UPB) for the future, an amortization schedule of a typical five-year-old loan at a 30-year fixed mortgage rate of 4.5 percent was used. In this analysis, a particular market is said to hit parity, or move out of a negative equity position, when the average underwater borrower’s value exceeds the remaining UPB.
Projecting where house prices will be five years in the future and using this forecast to deduce negative equity declines is a daunting task, and among those of us who produce forecasts, the results are never unanimous. The Wall Street Journal (WSJ) published an article[1] four years ago commenting on a projection of HPI going into 2011 and beyond. The WSJ survey of 92 economists revealed that 2011 was expected to be the first year of a slow recovery in home prices, when in fact, looking back at 2011 CoreLogic HPI data saw a decrease of 2.9 percent. One of the surveyed economists at Deutsche Bank predicted an increase of 37 percent in home prices by year-end 2014, while a professor of real-estate finance at George Mason University expected declines of 18 percent for the same period. Keep in mind; these are forecasts from the perspective of May 2010, following a 3.4-percent annual decline in the CoreLogic HPI series in 2009 and a 1.1 percent decline so far that year.
The point is that 2010 home price forecasts were not unanimous; still, the overall survey results did predict a rise of roughly 12 percent in the five years ending in December 2014. CoreLogic HPI data from December 2009 to March 2014 show a rise of 15.6 percent with three-quarters of the year still left to go. Nevertheless, the speed at which home prices would bounce back was not anticipated, and this speed has contributed significantly to the recovery and subsequent large drops in negative equity, which is allowing many CBSAs to hit parity sooner than without these price gains.
Using the above-mentioned methodology, 62 of the largest 100 CBSAs by population will reach parity before 2018. Only Oxnard-Thousand Oaks-Ventura, Calif. is projected to hit parity by the end of 2014, however, nine other California CBSAs will follow Oxnard by the end of 2015. This means that in Oxnard, Calif., as those borrowers who are currently underwater continue to pay down their debt while prices continue to rise, the average borrower will reach parity by the end of 2014. Thirteen more of the largest 100 CBSAs will reach parity in 2016, followed by 14 in 2017, 20 in 2018 and 38 CBSAs beyond 2018.
We have expanded the geographic area analyzed to include a total of 401 CBSAs, broken down by the year in which parity is projected to occur and further specified by each market’s Q4 2013 negative equity share (Figure 1). Additionally, the red line in the chart, which represents the cumulative percentage of CBSAs reaching parity, suggests that by the end of 2018, half of the metro areas will have reached parity while the rest continue to improve beyond 2018. From the chart, you can also see that of all the CBSAs that will reach parity in 2015, 23 percent currently have between 10 percent and 15 percent negative equity share, while 24 percent of those areas have a negative equity share greater than 25 percent.
Furthermore, the analysis shows that CBSAs with the highest negative equity shares are clearing sooner than those with the lowest negative equity shares. This suggests that of the 401 CBSAs used in this analysis, a main driver of the trend toward parity is location, and the markets with the highest shares of negative equity are also areas in which prices are bouncing back much quicker. This is happening in places like Miami, Fla. and San Jose, Calif. where the housing supply remains tight, but the desirability of the location remains high.
[1] Home Prices Projected to Begin Rebound in 2011 - https://online.wsj.com/news/articles/SB10001424052748704912004575252530764637448