Negative Equity

Paul Krugman writes in the New York Times today about "Negative Equity":

As home prices come back down to earth, many of these borrowers will find themselves with negative equity — owing more than their houses are worth. Negative equity, in turn, often leads to foreclosures and big losses for lenders.

In a follow-up blog post he writes:

I was strongly influenced by recent Boston Fed research, which finds a crucial role for negative equity in causing foreclosure:

Subprime lending played a role but that role was in creating a class of homeowners who were particularly sensitive to declining house price appreciation, rather than, as is commonly believed, by placing people in inherently problematic mortgages.

Rising annual expenses such as property taxes and user fees can trigger mortgage defaults which, in a rising market, can be resolved by sales or refinance. In a declining market foreclosures become more likely. Housing prices are quite sensitive to job growth and to basic quality of life factors like schools and infrastructure. When costs for infrastucture are not collected up front the pressure on the housing market is deferred, not eliminated. Need will manifest itself later either as increased taxation leading to defaults and/or reduced levels of service contributing to price depreciation and foreclosures.

North Carolina has been spared much of the nationwide housing problems. The market could well be described as soft as the population is still growing and houses are still being sold. Builders will still be constructing new homes but perhaps different homes as higher priced houses sit unsold. The big losers will be realtors as I predict less churn from existing homeowners who will stay put rather than risk their equity in upgrading in a softening market and the prospect of higher property taxes.

Update: Senate Votes To Help Strapped Homeowners. Legislation expands the role of the Federal Housing Administration in making federally insured loans more widely available. Like a scene from "It's A Wonderful Life" legislators have rallied to save the mortgage bankers and their customers just in time for the holidays.

"It is good before the Christmas season we have made a down payment on the solution to this problem," said Sen. Mel Martinez, R-Florida

The legislation will help the FHA "be a source of salvation for those families who were tricked into unaffordable loans," said Sen. Charles Schumer, D-New York