Underwater mortgages declined as foreclosures increased, while negative equity is expected to grow as home prices continue to slide. Image:; CC 666isMONEY/Flickr

Underwater mortgages in the U.S. declined for the third straight quarter for the period ending Sept. 30. The decline in negative equity is a result of increasing foreclosures. Negative equity is expected to increase in the near future as U.S. home values continue to decline.

Decline in negative equity deceiving

The number of homeowners with underwater mortgages fell from 23 percent in the second quarter to 22.5 percent in the third. According to CoreLogic, a housing market research firm, in a healthy housing market only 5 percent of homeowners owe more on their mortgages than the house is worth. The decline in negative equity was credited mainly to a surge in foreclosures taking people out of their mortgages. CoreLogic said homes for sale in foreclosure auctions averaged 110,000 a month from July to September, an increase from 98,000 in the same period last year. Banks foreclosed on a record 288,345 homes in the third quarter, a 7 percent increase from the second quarter and a 22 percent year-to-year increase.

Negative equity feeds on falling home prices

Total negative equity in the third quarter was $744 billion, declining from $800 billion a year ago. Negative equity is expected to rise because about 2.4 million homeowners hold equity of 5 percent or less. Any further decline in prices will pull their mortgages underwater. CoreLogic estimates that home values in the U.S. will have dropped by $1.7 trillion in 2010. The Federal Reserve said the value of residential real estate fell $649 billion in the third quarter to $16.6 trillion. Morgan Stanley issued a report last week stating that home prices could drop another 11 percent before finally hitting bottom in the first quarter of 2012.

A solution to negative equity

Underwater mortgages have a detrimental effect on residential real estate. Homeowners with negative equity quit maintaining their property and many are motivated to default on their mortgages. The Obama administration has been pressuring Fannie Mae and Freddie Mac to give underwater homeowners a few percentage points back on their mortgage. Real estate experts say such an equity handout is a temporary, hollow gesture. The only real solution to the negative equity problem, which is holding back the entire economy, is significant price appreciation in a competitive housing market.

Sources

Bloomberg

Associated Press

MSNBC

Image from Flikr.

Despite the high number of foreclosed properties flooding the housing market right now, both banks and builders in some cases are finding it impossible to sell houses. Reuters reports: “U.S. lenders and builders are turning to professional auctioneers to help them unload the unwanted real estate in a hurry.”

Hiring a professional auctioneer to unload a property is a last resort for companies looking to unload homes, and usually it means the seller will lose money on the property.

Winners and losers

The foreclosure auctions are great news for people looking for a bargain on a home, but they are bad news for banks and builders. And a home on the auction block means someone out there has already received bad news: Your home is foreclosed. Move out.

A silver lining is that lenders have started recognizing that they could stand to lose more on the home if they foreclose than if they work things out with the current homebuyers. Many banks now are waiting for owners to go through debt consolidation or debt management instead of foreclosing homes. The Mercury News explains why:

More than 2,000 Santa Clara County homeowners received foreclosure notices from their lenders in September, but a relative few actually had their homes sold at auction.

Foreclosed homes going once, going twice…

The situation in Santa Clara is present all over the country. Reuters reports that at a recent auction in Chicago, a seven-bedroom home was put up for auction.

“Any interest in this home at $7,000?” fast-talking auctioneer Renee Jones asked the crowd. “If not, we’ll move on.”

I find it tough to believe that no one wanted to buy a seven-bedroom home in Chicago for $7,000 (could it be a typeo?) but nevertheless, foreclosed homes for sale at auctions and online are at the highest numbers in recent history.

It ain’t over till the auctioneer sings

The number of foreclosed homes for sale hasn’t topped out yet. Auctioneers are gearing up for more business, according to Reuters:

Hudson & Marshall, one of the biggest auctioneers in the market … and its rivals say they are gearing up for more in the coming months, convinced that a moratorium on foreclosures earlier this year only postponed what they believe is an inevitable avalanche of new repossessions.