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Residential properties caught in equity abyss

Date posted:  7/22/15 08:15:00 AM Many homeowners owe more on their mortgage than their home is worth.

It's not a pretty percentage for homeowners. According to a recent report from RealtyTrac, approximately 17 percent of all residential properties are seriously underwater on their mortgage loans. That comes out to one in six homeowners across the nation who owe 25 percent more‡ on their mortgage than their home's estimated market value.

For example, Illinois had the third highest percentage of any state with residential properties seriously underwater. The Land of Lincoln had 30 percent of homes underwater in the second quarter of 2014, trailing only Nevada (32 percent) and Florida (30 percent).

A major part of Illinois' problem stems from Chicago, the largest city in the state and the third-most populated city in the country. Chicago had the fifth most seriously underwater homes, according to RealtyTrac, as three in 10 homeowners in The Windy City found themselves owing a quarter more on their mortgage than their property's estimate value.

The only cities with more seriously underwater homes were Lakeland, Florida; Las Vegas; Cleveland; and Palm Bay-Melbourne-Titusville, Florida.

"Home price appreciation has slowed in the last few months in many of the markets with the most underwater homes, slowing the pace at which homeowners are recovering equity lost during the Great Recession," said Daren Blomquist, vice president at RealtyTrac.

Some regions avoid negative equity better than others
But not all markets are doing poorly when it comes to equity, and it seems that many of those markets reside near the Pacific Ocean. The nation's major metro markets holding the most equity-rich properties - at least 50 percent equity - include San Francisco, Honolulu, Los Angeles and San Diego. New York is also in the mix on the East Coast.

Chris Pollinger, senior vice president of sales at First Team Real Estate in Southern California, told RealtyTrac that many homeowners in these areas are taking advantage of rising prices.

"With the recent increase in home prices, homeowners are reclaiming previously lost equity as they resurface from the downturn," Pollinger said. "This is causing fewer distressed homes in the marketplace."

Also tracking the markets that are make a strong resurgence, RealtyTrac said Colorado Springs, Colorado; Albuquerque, New Mexico; Lancaster, Pennsylvania; El Paso, Texas; Salt Lake City; and Worcester, Massachusetts, are the markets with the most resurfacing equity.

Cash-strapped homeowners who are now surfacing from underwater mortgages due to rising home values should consider a home equity line of credit for any major purchases or home renovations. This type of credit is granted to qualified buyers who put their homes up as collateral.

Digging out from the negative equity hole
Blomquist said one of the biggest problems for the nation's housing market stems from how far properties have fallen. Many homeowners who find themselves seriously underwater are in a deep cavity of negative equity, from which it will take time to escape.

In all, 9.1 million residential properties throughout the U.S. are seriously underwater.

"The average loan-to-value on the 9.1 million homes seriously underwater was 133 percent, and the average loan-to-value on the homes in foreclosure that are seriously underwater was 134 percent," Blomquist said.

Peter Dreier, a professor at Occidental College, told The Connecticut Post that underwater homes seem to cluster in certain areas‡.

"There are millions of people around the country who are underwater, but they're not randomly distributed," Dreier said.

The professor researched the subject and found that Hartford, Connecticut, had the highest overall rate of underwater homes. Nearby Bridgeport, Connecticut, had the 10th-highest concentration of underwater homes, with three of Bridgeport's ZIP codes falling in the top five percent of region's with the most properties in negative equity.