Surprise! Government report on Negative Equity Gets it Wrong

January 20, 2010

by Scott Sambucci

3 comments

A DSNews article from yesterday (“GAO Releases Report on Loan Performance and Negative Equity“) covers the release of a US Government Accountability Office report – Loan Performance and Negative Home Equity in the Nonprime Mortgage Market. The report is a look at loan performance and negative equity across the 16 US markets, taking a faulty “balance sheet” approach – examining metro level data and estimating the percentage of homeowners with negative equity based on June 30, 2009 data.  The report doesn’t account for recent market trends in these metros and thus incorrectly assesses the overall negative equity situation.

From the DSNews article about the report:

“Using the S&P/Case-Shiller index, the report estimated the percentage of borrowers with negative equity for 16 metropolitan areas. These percentages ranged from about 9 percent in Denver to more than 90 percent in Los Vegas. In the 16 metropolitan areas reviewed…”

Source: Loan Performance and Negative Home Equity in the Nonprime Mortgage Market published by United States Government Accountability Office, December 16, 2009

Source: Loan Performance and Negative Home Equity in the Nonprime Mortgage Market published by US Government Accountability Office (December 16, 2009)

This assessment fails to account for recent gains several metros, under-emphasizes a troubling trend for markets that appear to be do doing better than others and under-values markets that have highly negative estimates.   Looking at the market data for the latter half of 2009 for two of the three top and bottom markets listed in the report – Las Vegas, Miami, Denver and Boston starts to show trends not captured in the report:

Year-on-Year Housing Price Changes: Denver, Boston, Miami & Las Vegas

Year-on-Year Housing Price Changes: Denver, Boston, Miami & Las Vegas

The “good” market – Denver – is just now starting to feel the housing market pressure.  Denver bucked the national trends all throughout 2007 and 2008.  It wasn’t until July 2009 – one month after the data used in the GAO report that Denver prices had year-on-year losses:

Year-on-Year Housing Price Trends: Denver, CO

Look at year-over-year prices in Boston – it’s reached positive territory and has been steadily rising since April 2008.  The housing market began its decline way back in September 2005 according to Karl Case and John Quigley’s paper – “How Housing Busts End: House Prices, User Costs and Rigidities During Down Cycles” – presented 12 months ago at the January 2009 American Economics Association (AEA) annual meeting.  Boston was among the first markets hit in the current housing downturn and appears to be among the first work its way out of the doldrums. Isolating and magnifying the Boston metro year-on-year price trends, it’s clear that Boston’s trough occurred in June 2008:

Boston Housing Market: Year-on-year price trends since July 2008

Boston Housing Market: Year-on-year price trends since July 2008

Back in June 2008, the Case-Shiller HPI for Boston (BOXR) rose a few points before falling off later in the year. In 2009, the BOXR values again moved into positive ground before leveling off again in the Fall.  However, early indications for 2010 indicate that price levels the Spring will start at a higher baseline level than in 2008 and 2009:

Boston Metro Housing Market: Median Ask Prices since 01/07

Boston Metro Housing Market: Median Ask Prices since 01/07

Why is this important?  In the GAO report, Boston is estimated to have only 23.1% of homeowners with negative equity, one of the lowest rates of the 16 metros analyzed. If you measured negative equity positions for Boston metro homeowners in 2006 or 2007, the percentage would have assuredly been higher than the 23.1% reported in the GAO report.  This could have major implications for markets like Miami and Las Vegas with it comes to loan modifications and negative equity positions. A Public Policy Discussion Paper presented at the aforementiond AEA by Christopher Foote, Kristopher Gerardi and Paul Willen at the FRB Boston – “Negative Equity and Foreclosure: Theory and Evidence”- provides some empirical proof that negative equity positions do not automatically lead to foreclosures.  While some percentage of homeowners will inevitably walk away from their mortgages or face undesired foreclosures, improving market conditions on their own could eradicate much of the negative equity situations and pressure to force loan modifications in worse-off markets like Las Vegas and Miami.

Las Vegas hit its trough value in June 2009 for year-on-year prices and has been improving since – something we wrote in a post from earlier this month (see “Can’t Make a Comeback Unless You’ve Been Down…“). Miami’s year-on-year price trough hit in early 2009. Now look at median ask prices, a leading housing market indicator, for the Miami metro since January 2007.  Prices in Miami troughed in Fall 2008 and are starting the year at approximately the same level as January 2008, with a clear upward trend over the past 14-16 months.

Miami Housing Market: Median Ask Prices since 01/07

Miami Housing Market: Median Ask Prices since 01/07

It’s quite possible that a case of “do nothing” in terms of load modification in these markets and allowing them to run their course may very well be the right solution after all.

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