Falling home prices put more homeowners in negative equity in the last quarter of 2010, with the number of underwater mortgages rising to 11.1 million, according to figures released today by CoreLogic.
Nearly one-quarter of all residential mortgages, 23.1 percent, were in negative equity by the end of the year, with the borrower owing more in mortgage debt than the property is worth. That compares to 22.5 percent, or 10.8 million properties, in the third quarter of 2010.
The company is predicting that home values will decline another 5-10 percent in 2011. If that happens, CoreLogic predicts the rate of underwater homeowners could rise by 10 percentage points, to one-third of all outstanding mortgages. There are currently about 2.4 million homeowners with less than 5 percent equity, according to the report.
High rates of negative equity present two major problems for the housing market. First, homeowners who are significantly underwater on their mortgages are more likely to go into foreclosure. Second, it's more difficult for homeowners with negative or little equity to move up to better homes or relocate, since they lack the equity to fund a new home purchase. That's particularly true in the current mortgage lending climate, with lenders requiring significant down payments to approve a loan.
"Negative equity holds millions of borrowers captive in their homes, unable to move or sell their properties," said Mark Fleming, chief economist with CoreLogic. "Until the high level of negative equity begins to recede, the housing and mortgage finance markets will remain very sluggish."
Given that the majority of homebuyers are repeat purchasers who use the equity in their current homes for a down payment, housing markets in states with already high levels of negative equity would be most severely affected by a further decline in home values, according to CoreLogic.
Nevada had the highest percentage of homes in negative equity of all the states, with 65 percent of all mortgaged properties underwater. Other high-negative equity states were Arizona, 51 percent; Florida, 47 percent; Michigan, 36 percent and California, 32 percent.
By contrast, New York, Hawaii and North Dakota had some of the nation's fundamentally strongest housing markets, with over 70 percent of all mortgaged properties having at least 20 percent positive equity.