Despite positive news about rising home sales, the number of Americans with under water mortgages might be as worrying as anything else happening in the economy. When people owe more on their mortgages than their home is worth, it limits their ability to pursue new opportunities because they cannot afford to sell. In Chicago, First American CoreLogic reports that more than 550,000 homes were under water at the end of June. That translates to $134 billion in negative equity.
Statistics from the United States Census Bureau indicate that household mobility is at a 20-year low. According to Sam Khater, a senior economist with the consulting firm of American CoreLogic, under water mortgages are the primary reason why people are less mobile.
Lenders are wary about extending credit in housing markets where values are sinking, which feeds the negative cycle of inactivity in the housing market and pushes prices down even more. This damages the economy because under water homeowners have a tendency to accept the inevitability of foreclosure. Homeowners with negative equity are seven times more liable to go into foreclosure than people whose mortgage and home equity loans total between 95 and 100 percent of their home’s value.
Homes are no longer considered to be sources of future wealth. Consumers aren’t spending because they can’t rely on getting a low-interest home equity loan to buy their way out of a personal credit crunch. Khater notes that “Borrowers are beginning to treat a home more like a home and less like a financing vehicle.”
Economic growth is further impacted because these same homeowners (who, in most cases, have stayed current on their mortgage obligations) are delaying or eliminating home improvements due to fears that any additional investment in the home will not be economically realized in value or returned in the event of a sale. This inactivity is being felt by many home remodeling contractors, as well as retailers.