Homeowners Face Growing Risk of Negative Equity
Even though the real estate market is showing signs of stabilizing, many homeowners are still at risk. Over the next few years, millions could owe more on their mortgage than their home is worth. This situation is known as negative equity or being underwater.
According to a Deutsche Bank report, nearly half of U.S. mortgage borrowers could face negative equity by early 2011. That number is a sharp increase compared to previous years. When homeowners owe more than their home’s value, the risk of default and foreclosure rises significantly.
Why Negative Equity Is Increasing
The main cause of negative equity is falling home prices. Home values dropped sharply after peaking in 2006. A Zillow report shows that home prices declined over 22% nationwide from their peak.
Many buyers who purchased homes with a 20% down payment during that period have now lost all of that equity. As prices continue to decline, more homeowners are slipping underwater.
Experts warn that falling prices directly increase mortgage defaults. When homeowners cannot sell or refinance, financial stress grows.
Does Being Underwater Always Matter?
Negative equity does not affect everyone equally. Homeowners who plan to stay in their homes for five to seven years may recover lost value over time. However, problems arise when owners need to sell or refinance.
Experts advise homeowners to avoid borrowing against their home during this period. Taking out home equity loans or second mortgages can increase risk.
Warning Signs Your Home Value May Be Falling
Foreclosures in Your Neighborhood
Foreclosures nearby can quickly lower home values. One foreclosure on your block can reduce your home’s value by about 1%. Multiple foreclosures cause even larger drops and create a chain reaction across the neighborhood.
Homes Sitting on the Market Too Long
When homes stay for sale for several months, it signals weak demand. Sellers often lower prices to attract buyers. Longer selling times usually mean falling home values.
Rising Local Unemployment
High unemployment often leads to falling home prices. Cities with job losses tend to see more foreclosures and lower demand for housing. Areas dependent on struggling industries face higher risks.
Poor Home Maintenance
Visible neglect, such as peeling paint or damaged siding, can hurt neighborhood values. These signs may show that owners cannot afford repairs. As more homes fall into disrepair, property values decline further.
Final Takeaway
Negative equity remains a serious concern for many homeowners. Falling prices, job losses, and risky borrowing all increase the danger. While some homeowners may recover over time, others should act early. Understanding the warning signs can help protect your financial future.
Source: SmartMoney.com via AOL
