A story last week by the Wall Street Journal reveals a growing and troubling trend: One in six homeowners are under water, or living in a home in which they owe more than it’s worth. Instead of having the once-relied-upon equity in their home, the mortgage crisis has created negative equity for more than 75 million homeowners. For newer homeowners, the likelihood of being underwater increases: Approximately 29 percent of people who bought their home in the last five years is under water.
In the Twin Cities the economic picture is even more dismal. Minneapolis and St. Paul rank fifth in the nation’s most in-debt households, meaning that area homeowners hold less equity in their homes than the national average. According to Forbes and Moody’s, Americans hold an average of 46 percent of their property’s value in equity, a major drop from 2000 when it was near 60 percent. Yet in the Twin Cities, as of June of this year, homeowners hold a meager 27 percent in equity. That’s a major dip from just 2004, when average equity was at 49 percent in the Twin Cities.
Why are the Twin Cities drowning in negative equity? It has to do with the housing bubble, when Twin Cities home prices were serioulsy inflated and ripe for predatory lending, and the rising number of foreclosures and short sales that are occuring as a result. It’s estimated that every foreclosure in a neighborhood reduces surrounding home values by 10 percent. And while in 2001 it was popular to have multiple bids on a single home, demand for homes has plummeted along with the economy. On average, single-family homes sit on the market for nearly ten months.