Worrying Surge in Home Foreclosures Linked to Negative Equity

As homeowners worry about a “negative equity timebomb,” home foreclosures are rising for the second year.

According to ATTOM, there were 186,000 foreclosures in the first half of the year. The unstable property market and rising mortgage rates contribute to this trend. Some regions in America are experiencing significantly higher foreclosure rates than others.

Atlantic City, New Jersey saw the largest increase in foreclosures, with 6.8 properties per 10,000 facing repossession, according to Attom. Florence, South Carolina, New Haven, Connecticut, and Baltimore, Maryland followed suit.

Atlantic City’s high foreclosure levels are likely a result of the global epidemic when its local economy was boosted by significant stimulus measures, as stated by Villanova University economics professor David Fiorenza.

He referred to the $1.9 trillion American Rescue Plan Act of 2021. Atlantic City heavily relies on its gaming and entertainment sectors, which were shut down during the pandemic.

Experts agree that foreclosure rates are “catching up” after a lockout to protect homeowners.

Many areas with higher property prices also have higher property taxes, which burdens homeowners. Inflation, which reached 9.1 percent last year but has since dropped to three percent, is straining households.

To manage the crisis, the Federal Reserve has steadily raised interest rates to curb consumer spending. Mortgage rates have increased from around two percent in 2021 to just under seven percent.

This means that a $400,000 homebuyer now pays $1,000 more per month than they did two years ago. This week, the Fed raised interest rates to their highest level since 2001, potentially further increasing mortgage rates.

Many homeowners feel “trapped” in their homes after buying them when interest rates were low, which has slowed buyer activity. The property market is in turmoil, posing a threat to the house price increases driven by the pandemic.

For the first time in 11 years, the S&P Core-Logic Case-Shiller National Home Price Index showed a decline in home values last month. This has raised concerns about homeowners being at risk of negative equity, which occurs when the amount owed on a mortgage exceeds the property’s value.

In a healthy market, property values should appreciate, reducing the risk of negative equity. However, when prices fall and interest rates rise, consumers with low down payments are at risk of “going underwater.”

Homeowners lost $108.4 billion in equity this year. Washington, California, and Utah households saw their home equity drop by $5,400 in the first quarter of 2023. If property prices drop 5%, over 200,000 households could find themselves underwater on their mortgages.

Negative equity makes it harder for homeowners to sell or refinance their homes, trapping them. When house prices plummeted overnight during the 2008 financial crash, this issue escalated into a crisis.

When a homeowner experiences negative equity, they often file for foreclosure.

This article appeared in NewsHouse and has been published here with permission.

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Written by Western Reader

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