When the economic downturn hit, tens of millions of properties across the country lost significant portions of their values in a short period of time. That left many homeowners in a rather difficult position, in which they owed more on their mortgages – often quite a bit more – than their properties were worth. And while this resulted in a spike in problems like people simply abandoning their properties, or selling them in a short sale, the majority stuck with their underwater properties and continue to struggle with negative equity to this day as a result.
It should be noted, however, that negative equity isn't spread evenly throughout the country. In fact, at this point it is heavily concentrated in a relatively small number of cities that were hit hardest by the housing market's downturn in the first place. Indeed, metro areas where issues of foreclosure and other homeownership issues were prevalent are the places where underwater homeownership got a real foothold and has been difficult to shake in the five-plus years since economists say the recession officially ended.
What's going on?
Data in recent years shows that places like Las Vegas, Chicago, and Atlanta – those that saw property values drop the most, among other major economic issues that descended on them when the recession hit – are still struggling in the grips of major housing market problems. Foreclosures are more prevalent in many of these cities than elsewhere in the country, as is underwater homeownership. This is, however, largely due to the fact that negative equity can have a major impact not only on individual homeowners who struggle with this issue, but also those homeowners around them.
Therefore, in major cities like those listed above, the fact that about 1 in 5 homes or more can be struggling with negative equity is, necessarily, going to hurt those metro areas' chances for a faster recovery.
Why is that?
Massive amounts of underwater homeownership can hurt individual housing markets in two ways. First, it keeps people in their homes because they really don't have much of an option to sell their properties. Even after they've gotten back above water, in fact, they are still likely to struggle with marginal equity – that is, that the value of their home exceeds the remainder of their mortgage balance by something less than 20 percent – which makes it difficult to justify putting their homes on the market.
Moreover, though, those people also can't get into the market themselves and shop for new homes, which is going to make it more difficult to bring prices up for everyone, including for their own benefit.
That kind of lack of competition in a market can keep it in the doldrums for years, and many experts believe that there may not even be a lot of wiggle room in those cities most affected, potentially for years to come.
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