For most people, the largest purchase that they are ever likely to make in their lives will be a home purchase. In almost all countries where free-market forces are allowed to predominate, house prices have risen at a faster rate than wages since World War II. However, political and social pressures have come to bear which mean that more people than ever before aspire to own their own homes.
The only way for the average person to be able to buy a home when house price inflation outstrips wage inflation is to enable them to borrow more money against their earnings and/or to increase the repayment period on the loan. Schemes now exist where borrowers only pay the interest component of their loan (i.e. the capital is never repaid and so the “buyer” never owns the property) and of course the whole sub-prime fiasco was about making loans to people ill-placed to afford them.
Zillow said in a new report Thursday that around 2 million homeowners moved back above water last year. The online real-estate company estimated that 13.8 million borrowers were underwater at the end of the year, down from 15.7 million a year earlier, a decline of around 12%. U.S. home prices rose by 5.9% last year, though bigger price gains in some of the hardest hit housing markets had an outsized impact on returning borrowers in those regions to positive equity.. Others have said that last year’s drops were bigger. Lender Processing Services, another property data firm, estimated that there were 9.8 million underwater loans at the end of last year, a 35% drop from the 15.5 million at the start of the year.
Analysts at J.P. Morgan Securities , meanwhile, estimated that the ranks of the underwater fell from 11 million to 7 million last year, a drop of around 36%. A further 5% jump in home prices would reduce the underwater population to 5 million.
Estimates can vary for a number of reasons. Underwater borrowers can move back to positive equity by paying down their loan principal or by seeing prices rise. Properties can also “exit” negative equity when they go through foreclosure or when the bank approves a short sale. In those cases, borrowers aren’t being returned to positive equity—instead, they simply cease to be borrowers.
Read more: blogs.wsj.com