Rising Home Prices Save Underwater Borrowers

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A variety of indicators confirm that the U.S. housing market continued to show signs of improvement in the first quarter of 2013. The latest reading from the Standard & Poor’s/Case-Shiller index showed a 10.9 percent jump in home prices in the year to March. The national composite rose by 10.2 percent over the last four quarters, and all 20 cities posted positive year-over-year growth.

Meanwhile, the National Association of Realtors announced that total existing-home sales increased 0.6 percent in April to a seasonally-adjusted annualized rate of 4.97 million units, the highest level in more than three years. The U.S. Department of Commerce reported that the purchase of new homes increased 2.3 percent to a seasonally-adjusted annual rate of 454,000 units.

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To round it all out, CoreLogic, a leading residential property information, analytics and services provider, reported on Wednesday that the number of underwater homes declined by 850,000 in the first quarter.

A home is underwater or upside down when borrowers owe more on their mortgages than their homes are worth. If people borrow money against the equity in their homes, a decline in the value of their home can quickly drive them underwater. This was a major problem during the financial crisis and the collapse of the housing bubble.

But now that home prices are increasing, more and more people are emerging from negative equity. At the end of the first quarter, there were 9.7 million properties with negative equity, or 19.8 percent of all residential properties with mortgages. This is down from 10.5 million, or 21.7 percent of properties, at the end of the fourth quarter.

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“The impressive home price gains of 2012 and the beginning of 2013 have had a big impact on the distribution of residential home equity,” commented Dr. Mark Fleming, chief economist for CoreLogic. “During the past year, 1.7 million borrowers have regained positive equity. We expect the pent-up supply that falling negative equity releases will moderate price gains in many of the fast-appreciating markets this spring.”

Home Price

The rapid increase in home prices recently has stoked fears that the market may be entering another bubble. There are some reasonable arguments for and against this claim, but overall home prices remain below fair value, according to Trulia.

According to the firm, national home prices are still 7 percent undervalued. In comparison, the housing bubble of yesteryear saw home prices become overvalued by almost 40 percent in the first quarter of 2006. After the bubble popped, home prices became 15 percent undervalued in the fourth quarter of 2011.

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“The negative equity burden continues to recede across the country thanks largely to rising home prices,” commented Anand Nallathambi, president and CEO of CoreLogic. “We are still far below peak home price levels, but tight supplies in many areas coupled with continued demand for single family homes should help us close the gap.”

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