Many people trying to sell their homes end up having to use small personal loans to fund shortfalls. The main post-recessionary reason people have shortfalls is due to the loss of value on their property. Although the recession has been deemed officially “over” by experts, the market is far from returning to normal.
The problem of negative equity
In fact, economists are predicting that many homeowners will be in worse shape within the next two years than they have been in previous. Studies are showing that almost half of the US’s 52 million borrowers will have negative equity by the beginning of 2011. According to the report done by Deutsche Bank, the number of borrowers with negative equity is telling of a huge pool of owners who will either default or go into foreclosure.
Down payments valued at zero dollars
Negative equity happens due to various factors, but the most common is the decline of home values. Since the recession, that has been a chronic problem within the housing market. According to real estate website Zillow.com, home values throughout the country have declined by 22.3% since mid-2006. To the average home owner who put down 20% of their mortgage, that means their down payments have lost their complete dollar value. Karen Weaver, research analyst at Deutsche Bank, said, “The continued decline of US home prices will contribute to rapidly rising rates of negative equity. The most obvious implication is for mortgage defaults.”
Watch for the signs
When it comes to the housing market, all homeowners should be watching the market. There are clear signs when a home is at risk of declining in value. More and more homes are proving that falling behind or going into foreclosure have more to do with home value drop based on the economy, than on job, credit, or income. Here are some signs to watch out for:
- Foreclosures in your area. The biggest danger sign to watch for is when neighboring homes start falling into foreclosure. Mark Zandi, chief economist at Economy.com, said “When one home on the block goes into foreclosure, every home’s value drops by 1%… if two homes on the block go into foreclosure, every home’s value drops by 3%.” Once homes start dropping considerably due to distressed properties in the neighborhood, it’s difficult to overcome. While small personal loans or savings can rescue homeowners in minor trouble, adding a difficult neighborhood market can mean disaster.
- Homes not selling. Another sign to watch for is the number of homes in a neighborhood that are not selling. The underlying message is that buyers and sellers have not been able to come to an agreement on the transaction. Zandi believes that “the time on the market is always a good barometer of demand for homes and for the price homes are transacting at. The longer it appears that neighbors are taking to sell their home, the more likely it is that they are not getting the price they want and that prices are falling.”
- Rising unemployment rates. Generally speaking, cities with the highest unemployment rates suffer from the highest home value loss. For example, Merced, California’s unemployment rate is one of the highest in the country at 17.6% and home values have declined by over 40%. Homeowners in areas with high unemployment rates are cautioned that if primary industry in their cities were hurt due to the recession, their home values may fall even quicker.
- Distressed homes. Neighborhoods with a notably high number of distressed properties are at a higher risk of homes losing value. Zandi confirmed, “Normally dented siding, peeling paint and broken porches are signs that neighbors are having trouble making ends meet and can’t pay for the care of their homes. The mere fact that they are not investing in their homes will affect you, too.”
Time is the key to overcoming negative equity
Although the issue of negative equity is a serious one, it isn’t an inevitable repercussion of the recession. Homeowners who plan on keeping their homes for the next five to seven years most likely will recoup any lost value of their properties. For homeowners who are finding it hard to make ends meet, small personal loans should be used for the shortfall, rather than borrowing against the mortgage. Then taking a wait-and-see attitude may be the best option in coming months.