…is…wait for it…the number of formerly underwater mortgages that have now breached the surface. You can see them up there above the waves, a showering mist of former indebtedness spraying from their blowholes, evaporating in the sea breeze as home prices finally appreciate.
OK, sorry about that. But I think it’s fair to say that I’ve got solid pessimistic street cred re where the economy’s been, where it is, and where it’s going, so when I see something I like in the indicators, I get a little excited.
And truth be told, I’m only a little excited because there are still 11 million homeowners underwater and millions of foreclosures in the pipeline, but here’s the good news:
According to CoreLogic:
Approximately 600,000 borrowers reached a state of positive equity at the end of the second quarter of 2012, adding to the more than 700,000 borrowers that moved into positive equity in the first quarter of this year.
That’s 1.3 million who’ve broken the surface in the first half of 2012, as home prices have finally begun to rise fairly broadly across the land. That’s obviously good news for the homeowners themselves, but why do I think it’s a potentially positive indicator for the broader economy?
Because if it keeps up, and a few other things break the right way, a lot of these folks will refi, and that will constitute a substantial stimulus to the macro-economy, worth potentially hundreds of billions of dollars.
Although the administration has a program to help underwater borrowers refinance (HARP), it’s tough to generate the wave of refi’s we should be seeing at such low mortgage rates when so many homes are worth less than their outstanding mortgage debt. To reliably generate more refis, we need home prices to come back to life and begin creeping out of the primordial soup in which they’ve been stuck since the housing bubble popped five years ago. And now, there’s good evidence that is in fact happening—see the second figure in this post.
Then you’ve got recent Fed actions—QE3—wherein they buy up a bunch of mortgage-backed-securities in order to increase liquidity and lending in the housing finance market. This will help keep mortgage rates around their historical lows for the near future, and that should further incentivize refis.
So, where’s the catch? Well, many mortgage lenders are still stuck in risk aversion mode—they went from giving a phat loan to anyone with a pulse to insisting on stellar credit (I recently refied and the lender was bugging the crap out of me about some alleged DC traffic ticket that I had no idea about). That could queer the deal.
And then, there’s all the negative equity still in the system and the fact that the improvement is proceeding slowly. As CoreLogic points out,
Together, negative equity [“underwater”] and near-negative equity mortgages accounted for 27.0 percent of all residential properties with a mortgage nationwide in the second quarter, down from 28.5 percent at the end of the first quarter in 2012. Nationally, negative equity decreased from $691 billion at the end of the first quarter in 2012 to $689 billion at the end of the second quarter, a decrease of $2 billion driven in large part by an improvement in house price levels.
OK, that’s not a huge gain but it’s movement in the right direction.
Second, refi activity hasn’t really taken off though I think it will (and Mark Zandi, who watches this stuff closely, says it already has). Third, as I noted, and as the CoreLogic percentages reveal, there’s still a large share of homes in negative equity. Here’s a figure showing the share of underwater mortgages by state (“near negative equity” refers to mortgages within 5% of negative equity).
CoreLogic: NEGATIVE (AND NEAR NEGATIVE) EQUITY BY STATE, 2012, Q2
The following figure, on the other hand, shows both negative equity and distressed sales (foreclosures and short sales) trending in the right direction (note that the negative equity bar excludes “near negative equity”).
So, the timing of rock bottom mortgage rates, the Fed’s move, and prices finally crawling off the bottom may be fortuitous here. And best of all, note that none of this depends on Congress to do something helpful for the economy.