How negative equity drives up prices

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Negative equity, which is the result of homeowners owing more on their mortgages than their homes are worth, has always been viewed as a detriment to the housing economy because it freezes owners in their homes and makes them liable to foreclosure.

At a panel today at the National Association of Realtors conference, Zillow’s chief economist put a different spin on negative equity.

Stan Humphries argued that current market conditions, when inventories are at record lows and negative equity afflicts 31.4 percent of all homeowners with a mortgage, negative equity is not only diminishing demand it is also further reducing the available supply of homes for sale by making it impossible for owners to sell without taking a loss.

Lower inventories lead to price increases and at some point values rise sufficiently to move number of owners above water, and making it possible for them to sell, resulting in a temporary increase in inventories.

Prices might plateau temporarily until demand reduces inventories again and prices resume their climb. The result is a “staircase” rather than a “u-shaped” recovery, Humphries said. This scenario is most likely in middle to lower tiered priced housing markets.

During the panel on the economic outlook, Lawrence Yun from the National Association of Realtors said due to current conditions he has raised his for forecast and expects median prices to rise ten percent on an annual basis a year from now.

Yun said a reduction in distress sale market share from one-third of the market to 15 percent or less has contributed more to increases in median prices and actual appreciation.