A couple of weeks ago CoreLogic came out with their negative equity report for the second quarter and once again it showed about 30% of Chicago homeowners with little or no equity in their homes. To be exact, 25.2% are completely underwater on their mortgage and another 5.2% are within 5% of being underwater. That's pretty much the same as it was in the first quarter.
When people have little to no equity left in their homes they start to exhibit several behaviors that explain a lot of what is going on in the Chicago real estate market:
- They decide to stop paying their mortgages. Why not? They can live there for free for a couple of years before their lender gets around to doing anything about it. And there's nothing left of their "investment" to protect. Eventually their home ends up in foreclosure and they end up renting since they can't buy anything with a foreclosure on their record.
- They decide to stay put because they can't afford to sell - they'd have to write a check at closing.
- They decide to become landlords and rent their place out so that they can cover most of their expenses and move on with their life.
This is a huge impact. While the first behavior actually depresses home prices the latter two behaviors support prices by keeping supply off of the market. If there is ever any sign of rising prices these potential sellers will bring supply back to the market keeping prices depressed for a long time.
Unfortunately, the one thing these underwater homeowners can't do is benefit from the new lower mortgage rates since their home won't appraise for enough to get a new loan. So they are stuck paying a high interest rate and for the vast majority of them those monthly "principal" payments are not really building any equity.