Homeowners Drowning in Negative Equity

If you have no desire or need to sell your home, then falling home prices are just on paper and likely temporary, right? Depends on how you look at it.

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Falling home prices put more borrowers in a negative equity position, that is owing more on their mortgage(s) than their homes are worth. We call that "underwater," and for good reason, because for some borrowers that sense of drowning in debt has profound implications.

Today Zillow.com reported a new high in negative equity: 28.4 percent of single family homes with a mortgage (remember, 32 percent of all homeowners do not have a mortgage).

That's a national average, but the numbers are far worse in some of the nation's big metros. Atlanta, for example, has a 55.7 percent negative equity rate. Denver, 41 percent, Chicago nearly 46 percent. This is on top of all the foreclosure hot spots like Phoenix, where close to three quarters of all borrowers are underwater.

Why should we care if it's all on paper?

"Higher rates of negative equity are creating a lot of latent vulnerability in the housing stock, where if the household then encounters some economic shock, like the loss of a job or divorce or death, then that household is much, much more likely to go into foreclosure," notes Zillow's Stan Humphries. "So it just means that higher rates of negative equity, we’re going to see elevated rates of foreclosure for the next two to three years."

But higher rates of foreclosure put increasing pressure on home prices, causing them to fall further, which in turn puts even more borrowers underwater. One begets the other begets the other. Humphries thinks this is a bigger deal than the "walkaway" issue (or strategic default); that's where borrowers see no chance of ever having equity in their homes, so they walk away rather than becoming permanent pseudo-renters, responsible for the high cost of the home's upkeep but reaping no equity benefit.

"The best research that’s been done right now seems to suggest that negative equity impact on strategic defaults really kicks in at very high rates of value to loan ratio, so that means when people are more like 30-40 percent underwater does it start to create proactive behavior where they want to walk away from the mortgage. And even at those rates of loan to values, you’re still seeing strategic defaults be a relative…not a majority behavior," says Humphries.

Well there are certainly plenty of large metro markets, as I cited previously, where negative equity is that high. And here's a little more food for thought: What about mobility? As the economy improves, and we see those jobs numbers rise, as we did last Friday, we have to consider the fact that many people taking these jobs may be required to move for said jobs. Those same borrowers may not be able to take the loss on the home that's required to sell it. What then?

What is the fate of the nation's credit quality. It's already tough enough to get a good mortgage when you have good credit. Home buyer confidence and demand are the only remedies right now for the housing/foreclosure crisis.

Sadly, we have neither.

Questions? Comments? RealtyCheck@cnbc.comAnd follow me on Twitter @Diana_Olick