Millions of 'underwater' homeowners are trapped

Spring housing: Bloom or bust
Spring housing: Bloom or bust   

Temperatures are warming and potential homebuyers are coming out to shop, but they are finding precious little for sale.

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Weak housing construction and the growth of the single-family rental market have pushed down supply for sure, but one nagging leftover of the housing crash is literally trapping potential sellers in their homes: Negative equity.

Some 5.4 million homes, or 10.4 percent of all homes with a mortgage, were still in a negative equity position, or "underwater," in the fourth quarter of 2014, according to CoreLogic, as their owners owe more on the mortgage than the home is currently worth. This is down considerably —18.9 percent, from a year ago—but it still keeps these borrowers from putting their homes on the market, because they would lose money. ( Tweet This )

Additionally, of the 49.9 million U.S. homes with a mortgage, approximately 10 million (20 percent) have less than 20 percent equity, and 1.4 million have less than 5 percent, according to CoreLogic. These homeowners also would have a difficult time selling because not only would they lose money in the process, but they also might not qualify for a new mortgage.

House under water mortgages
John Lund | Getty Images

"Negative equity continued to be a serious issue for the housing market and the U.S. economy," said Anand Nallathambi, president and CEO of CoreLogic. "We expect the situation to improve over the course of 2015."

Improvement will come with higher home prices. Rising prices in 2014 brought more than 1 million borrowers into a positive equity position. The problem, however, will take considerable time to work through and will continue to affect not only housing supply, but also consumer spending overall.

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Adding to the issue is that the bulk of negative equity is concentrated at the lower end of the housing market. Owners of less expensive homes are three times more likely to be underwater than owners of expensive homes, according to a recent note by economists at Deutsche Bank.

These less expensive homes are where supply is lacking most. Builders are concentrating on higher-end homes, because that's where they can get the margin they need. First-time homebuyer demand is growing, but lower-priced homes are just not there for the buying.

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