Economic recoveries often depend on the state of the housing market. While an April increase in housing prices has led many analysts to talk of a housing recovery, U.S. home values still remain depressed (see the chart below). According to a Zillow real estate research report, they are still some 25% below their 2007 peak.
Perhaps the most telling indicator of the state of the housing market is that, as of the first quarter 2012, 31.4% of all owner-occupied homeowners with a mortgage were “underwater,” which means they had a mortgage greater than the market value of their home. As the table below shows, these homeowners owed, on average, $75,644 more than what their home was worth.
To this point, the high percentage of underwater homeowners represents, in the words of Zillow, only “a potential danger.” That is because “the majority of underwater homeowners continue to make regular payments on their mortgage, with only 10.1% percent of the 31.4% nationwide being delinquent.” The following figure highlights the percent of delinquent/underwater homeowners in the largest metropolitan areas.
At the same time, as Zillow notes:
With nearly a third of the nation’s mortgaged homeowners in negative equity and the average underwater homeowner having a home value that is 31 percent lower than their mortgage balance, negative equity will prove both to be difficult to fully eradicate near-term and to have pernicious effects longer term as some households continue to encounter short-term financial trouble even with a slowly improving broader economy. Should economic growth slow, more homeowners will not be able to make timely mortgage payments, thereby increasing delinquency rates and eventually foreclosures.
In other words, if the economy slows, or interest rates rise, two very likely possibilities, the housing market could deteriorate quickly, intensifying economic problems. In short, we are a long way from recovery.