Is Negative Equity Driving Prices Up?
I’ve recently seen two articles suggesting that negative equity could be driving prices up.
At first, this seems absurd, but there’s actually some perverse logic in this paradoxical concept.
Think about the Boise real estate market with its shortage of listings, multiple offers, and homes selling above asking prices.
Markets and prices are driven by supply and demand.
In the Boise real estate market, demand is currently outstripping supply.
That’s driving prices up.
One reason we don’t have more listings is that roughly 20-30% of potential sellers are “under water”, owing more than their homes are worth.
Those potential sellers can’t sell without bringing money to closing, so they hang on and wait for higher prices.
That, in turn perpetuates our shortage of listings.
As prices rise, some of those potential sellers will realize they are no longer “under water” and list their homes.
That will help to balance supply and demand, and could result in our market leveling off.
Interesting concept, isn’t it?
Your thoughts?
Sources: HousingWire.com article and DSNews.com article
June 13th, 2012 Posted in Inside Real Estate
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2 Responses to “Is Negative Equity Driving Prices Up?”
By love on Jun 13, 2012
Plausible. You have the eyes on the street…makes sense.
To what extend does the area have interest only and variable loans from the bubble…our interest rate policy has kept those from recasting too badly and helped many underwater hang on.
I also suspect a hotter rental market is helping.
Do you expect that tax status of short selling which triggers at end of year to change the dynamic?
By philhoov on Jun 13, 2012
This whole concept caught me by surprise until I saw the articles, but it does make sense in a paradoxical way.
My first question, when considering taking a new listing, is “What do you owe?” because I have had many underwater sellers and no longer do short sales.
Our market is pretty conservative and I don’t think we have a lot of overhanging ARM or interest-only loans.
I mostly see 15 and 30-year fixed loans.
I think Congress will extend the tax status for short sellers, but who knows with that bunch?
Yes, cheap money has driven down interest rates on variable loans, which has helped underwater borrowers with ARMs to hang on.