Negative equity datapoint of the day

I’m slowly becoming convinced that 95% of talk about negative equity comes either from anecdote or from extrapolation, and that there are actually few if any reliable statistics on how much negative equity there really is in the US.

But Noelle Knox of USA Today had an interesting story last week:

Here’s an alarming fact about Sacramento’s housing market: About one of every five existing homes on the market is a “short sale.” That means the home is worth less than the value of the mortgage, and the lender is willing to accept less than full repayment of the loan to avoid foreclosure, says Tracey Saizan, president of the Sacramento Association of Realtors.

Now, USA Today is notoriously unreliable when it comes to economic reporting, so I’m not taking this fully at face value. On the other hand, this sort of number doesn’t seem like the sort of thing that the president of the Sacramento Association of Realtors would just make up.

So let’s assume the number is true. That’s still no reason to panic. Read on a bit further, and you’ll find out that the total number of homes on the market in Sacramento is actually slightly lower than average, which means that 20% of a small number is a very small number. Now remember that subprime mortgages taken out at the beginning of 2006 are by far the worst performing subprime mortgages in living memory: a lot of them went straight into default, especially in California.

In that situation, it makes sense for a borrower to try to sell his house in distress, rather than go through foreclosure. But once these houses are sold, the problem is largely in the past.

It’s worth remembering, too, that many subprime mortgages capitalized interest payments at the beginning, when the buyer was incurring the biggest expenses associated with moving house. So it’s entirely possible that the house might be worth less than the mortgage even if the house hasn’t actually fallen much in value. According to the USA Today article, Sacramento prices are down 4.3% from a year ago — painful, to be sure, but hardly catastrophic. There’s no particular reason to believe they’ll continue falling, either: after all, New York, another bubblicious city, has a housing market on fire right now.