$715 billion is a lot of money.
That’s the estimated amount of “underwaterness” hobbling the housing sector in the fourth quarter. A mortgage is considered underwater when the amount of the loan is larger than the value of the underlying property, resulting in a negative equity position for the owner.
The more negative equity a homeowner has, the more likely the owner will default. The resulting foreclosures are a negative rippling through the entire recovery.
As Federal Reserve Chairman Ben Bernanke told Congress this week, “problems in U.S. housing and mortgage markets have continued to hold down not only construction and related industries, but also household wealth and confidence.”
According to mortgage-data firm CoreLogic, 11.1 million of homeowners had an underwater mortgage in the fourth quarter, representing a large 22.8% of all residential properties with a mortgage. The share has not come down much since the recovery started in 2009.
Of those underwater borrowers, 6.7 million have only a primary mortgage, with an average negative equity of $51,000. Of the 4.4 million with first and second liens, the average amount is $84,000. According to CoreLogic, an estimated $715.3 billion in negative equity is floating throughout the housing market.
Until that negative equity is sopped up, housing will not recover and home prices will remain under pressure.
Policymakers have taken a shot at solving the problem. There has been little headway in part because of resistance from lenders and investors.
But the sheer magnitude of negative equity also hobbles any government solution. For instance, the latest idea agreed to by state attorneys general would help only about 1 million distressed owners–a drop in the bucket compared with the number of underwater owners.
Washington right now has neither the money nor the political will to provide big-ticket assistance to distressed homeowners.
Instead, the main tonic is better job and income growth. Already, the recovery has helped to lower the mortgage delinquency rate, if only a bit.
This path, however, carries the same risk that overhangs the overall outlook: the euro-zone debt crisis, spiking gasoline prices, and a China slowdown.
“If there is a hiccup in the economic recovery, it could mean a rise in foreclosures,” says Mark Fleming, chief economist with CoreLogic.