And now, worries of a new recession brought on by the coronavirus crisis could compound their troubles.
“COVID is going to introduce a period of lower demand for housing,” said Jason Richardson, the director of research and evaluation for the National Community Reinvestment Coalition. “This is important, since it is this demand for housing that supports home values,” he said, adding that within a few months he expects areas where home values have been depressed for years to see values fall even further.
So far, the national housing market remains in good shape.
According to CoreLogic Inc., a company that tracks the property market, home values nationwide have risen for eight consecutive years and were up 4% in January 2020 when compared to a year earlier. Meanwhile, the percentage of homeowners underwater, meaning the mortgage debt on their home is greater than the current market value of the home, has declined sharply and totaled nearly 2 million homes at the end of last year.
During the peak of the financial crisis in 2009, one in four U.S. homes was underwater (also called negative equity), according to CoreLogic. Yet by the end of last year, the national average negative equity rate was 3.5%.
But an analysis of CoreLogic data by Capital News Service found 10 clusters across the United States with high levels of underwater mortgages, including parts of Maryland, New Jersey, Connecticut, Illinois and Iowa. According to a separate analysis by CoreLogic published in March, Maryland – one of the nation’s wealthiest states – ranks seventh in the nation for the percentage of underwater residential properties.
The places most affected in these states tend to fall into two categories: rural communities with weak economies and urban minority neighborhoods in cities such as Chicago and Baltimore where high crime is leading to population decline.
The unprecedented Covid-19 pandemic has put a financial strain on families everywhere, but families without equity in their homes are more likely to end up in foreclosure, according to CoreLogic’s chief economist Frank Nothaft.
“If you’re in negative equity, (you) may be better off allowing the foreclosure,” he said.
The Coronavirus Aid, Relief and Economic Security (CARES) Act passed by Congress in March provides a forbearance program for borrowers with federally backed mortgages, which amounts to roughly three-quarters of all mortgages outstanding in the United States. The program allows consumers to pause or reduce their mortgage payments.
“This is an important relief valve for families caught off guard,” Nothaft said, but “there is a segment of the population that is not covered.”
Negative equity is a big problem for families because it erodes their net worth and weakens their sense of financial security. Many homeowners depend on rising home equity to start or grow businesses, pay college tuition, retrain for better jobs, and fund their retirement.
When home equity is negative, it not only hurts families, but also their communities because residents are less likely to donate to local charities and more likely to receive a reduction in property taxes, which fund schools and other local services.
In a speech last year, Federal Reserve Chairman Jerome Powell said that during the Great Recession a decade ago, many low- and moderate-income homeowners saw their wealth stripped away as home values dropped and have not recovered as quickly or completely as more affluent families.
“When lower-income individuals and families struggle, it harms their health and well-being and also weakens our economy,” Powell said. He encouraged banks to do more to support these communities.
Richardson at the National Community Reinvestment Coalition, a nonprofit that promotes access to banking services in traditionally underserved communities, contends that bank lending practices are part of the problem.
“If no one is getting loans, you will see home values remain low,” he said. “The reason that (banks) can’t lend to these communities is because there isn’t equity to lend on. It’s a chicken and egg scenario.”
That’s part of the problem in sections of Chicago’s South Side, which is home to many African-Americans and Hispanic families that are underwater.
Deborah Moore, an associate director at Neighborhood Housing Services of Chicago Inc., said that many minorities in Chicago purchased homes decades ago expecting values to rise high enough to pay their children’s college tuition and to assure a comfortable retirement.
For some families, Moore said, that hasn’t happened.
Instead, the property market in some of these communities has entered a vicious cycle where high crime and high taxes have prompted residents to flee and let their homes fall into foreclosure, putting downward pressure on the values of other homes in the community. As values fall, there is less incentive for remaining homeowners to repair or maintain the homes, which pushes values down even further.
“When you have exterior issues that aren’t being fixed it brings down property values,” said Moore, adding that this isn’t a problem on the largely white North Side of Chicago. “If your house is on the North Side, it’s going up but if you’re in the South Side, that’s not always the case.”
The analysis by CNS found that Cook County as a whole, which includes Chicago, had a negative equity rate of 6.3% at the end of last year. But 23 ZIP codes in Cook County with majority African-American residents and 10 ZIP codes with majority Hispanic residents had negative equity rates greater than 10% at the end of last year. No other county in the U.S. had as many ZIP codes with large percentages of underwater mortgages.
The CNS analysis of the CoreLogic data also found that among all U.S. ZIP codes with negative equity rates greater than or equal to 4%, 15% of homeowners were African-American or Hispanic. In ZIP codes with negative equity rates lower than 4%, only 7% of homeowners were African-American or Hispanic.
In Maryland, 10 counties had above-average percentages of underwater mortgages and included both rural and urban locations.
In Wicomico County, Maryland’s top agricultural county, the percentage of underwater mortgages was 9.14% at the end of last year, the highest of any county.
Within Wicomico, four ZIP codes had underwater mortgage rates higher than 10%. While the county’s overall rate is down from 18% at the height of the financial crisis in 2009, it’s still considerably higher than the state average of 5.3%. Economists say the county is suffering from population decline and job losses.
In Maryland’s Prince George’s County, which borders Washington, D.C., and has a predominately African-American population, the underwater mortgage rate declined from 37% of homes in 2009 to just 6.89% at the end of last year. Still, three ZIP codes in Prince George’s County reported negative equity rates greater than 10% at the end of last year.
Yolanda Muckle, president of the Prince George’s County Real Estate Association, said while the situation in the county has improved dramatically in recent years, the problems that linger can be attributed to previously inflated home values and “people getting loans during the housing crisis that weren’t good and now they can’t pay off these loans.”
Jeff Tucker, an economist at Zillow Group Inc., said another reason why black and Hispanic borrowers have a higher level of negative equity is because they are more likely to have low-down-payment mortgages.
“That lower share of equity in their homes makes homeowners of color much more likely to experience negative equity in the event of a modest decline in home prices,” he said.
If the economy contracts and home prices decline, as Zillow is currently forecasting, Tucker said these issues could be exacerbated and more borrowers will fall underwater. He added that borrowers who opt for mortgage forbearance via the CARES act could also find themselves in trouble.
“If many of those borrowers defer payments for several months, they could also find themselves underwater when accounting for the deferred payments,” Tucker said.
Predominately white communities facing high levels of underwater mortgages tend to be located in largely rural areas that are struggling with population decline and job losses in agriculture and manufacturing.
For some of these states, the underwater issue is relatively new.
Iowa, a state that didn’t experience significant housing problems during the Great Recession, now ranks fourth on CoreLogic’s list of states with the highest percentage of underwater mortgages. In small towns across Iowa’s Wayne and Keokuk Counties, a growing number or residents are leaving in search of better job prospects, reducing the demand and value of homes.
Roughly 85% of Iowa’s land is used for farming, and one in five Iowans is employed by the agriculture industry. Record floods in 2019 made output extremely volatile, according to experts. Now the coronavirus crisis is threatening livestock farming.
“Our rural areas are contracting, both demographically and in terms of overall economic output, which means that those areas will not see housing appreciation to the same extent that growing areas do,” said David Swenson, an economist at Iowa State University. “It is likely that stagnant housing values are to blame.”
CoreLogic economist Nothaft expects that the pandemic will cause significantly slower home price gains nationwide, but especially in Connecticut and New Jersey, two COVID-19 hotspots that already have large numbers of underwater mortgages.
“Behavior of home prices is very important for the equity position of homeowners,” said Nothaft. “Illness and death can be disruptive. That affects income flow, and this is the trigger that leads to delinquency on the mortgage loan.”
The CoreLogic research team has forecast 2020 foreclosure rates based on the recent high level of unemployment insurance claims. In a scenario where 20% of Americans are unemployed, Nothaft estimates that 5.5 million homeowners will be 90 days delinquent, in foreclosure proceedings, or 90 days into a forbearance proceeding with their lender.
“Even for an economist, the numbers are just mind-boggling,” he said.