Economy Watch: Negative Equity Continues to Drop

By Dees Stribling, Contributing Editor

Zillow has released its latest Negative Equity Report, which says that the national negative equity rate was 18.8 percent in the first quarter of 2014 (that is, the percentage of mortgaged owner-occupied homes with negative equity). That’s down from a peak of 31.4 percent in the first quarter of 2012, and down from 19.4 percent in the fourth quarter of 2013. Negative equity has fallen for eight consecutive quarters as U.S. home values have risen.

About 9.7 million mortgages are still underwater. The bulk of underwater homeowners, roughly 47 percent, are underwater by less than 20 percent of their loan value, and they will soon cross over into positive equity territory, Zillow predicts. That’s a good thing, but not quite out of the woods, since those homeowners will still be effectively underwater, because selling a house in that situation wouldn’t generate enough of a profit to pay the expenses associated with a sale, or form a down payment for buying a new residence.

There are also still mortgages that are deeply underwater. According to Zillow, about 6.2 percent of borrowers are currently stuck with LTVs above 140 percent. It would take years of property appreciation and keeping current on such a Sisyphean mortgage to venture into positive equity, so it’s likely that eventually many of these properties will be subject to short sales or foreclosures.

Most states’ coincident indexes up

The Federal Reserve Bank of Philadelphia reported on Tuesday that in April coincident indexes increased in 47 states, decreased in two, and remained stable in one, compared with March. Over the past three months, the indexes increased in 45 states and decreased in five.

There was no particular geographic pattern to the three-month increases in the coincident indexes, since most New England states, some Midwestern states, some Southern states and some Western states all saw their indexes rise more than 1 percent. No state’s index was down more than 1 percent, though Alabama was down between 0.5 percent and 1 percent. The four other states that saw decreases over the last three months were Mississippi, Louisiana, New Mexico and Alaska.

The Philly Fed calculates the coincident indexes by combining four state-level indicators to summarize current economic conditions in a single statistic. The four state-level variables are payroll employment; average hours worked in manufacturing; the unemployment rate; and wage and salary disbursements, taking into account inflation as reflected by the CPI.

Fed funds rate (probably) to remain low

Speaking at the New York Association for Business Economics, New York Federal Reserve president William Dudley said on Tuesday that he expects Federal Funds rates to stay low, even if the Fed hits its 2 percent inflation target (which it did last month, and which Dudley seems to expect). “The federal funds rate consistent with 2 percent… inflation over the long run is likely to be well below the 4.25 percent average level that has applied historically when inflation was around 2 percent,” he notes. “Precisely how much lower is difficult to say at this point in time.”

Wall Street was in a correction mood on Tuesday, with the Dow Jones Industrial Average off 137.55 points, or 0.83 percent. The S&P 500 was down 0.65 percent and the Nasdaq declined 0.7 percent.