Negative Home Equity Rate Falls in Second Quarter

New homeThe number of U.S. homeowners who owe more on their mortgages than their houses are worth fell to 7.1 million at the end of the second quarter of 2013, an improvement of 2.5 million from the 9.6 million underwater loans at the end of the first quarter of the year. That number represents 14.5% of 41.5 million U.S. mortgage loans. The total value of the underwater loans is $428 billion.

The data was published Tuesday by housing research firm CoreLogic Inc. (NYSE: CLGX). The sharp drop in underwater loans is due to primarily to recent increases in home prices. CoreLogic’s chief economist said:

In just the first half of the year, almost three and a half million homeowners have gained positive equity, but the pace of improvement likely will slow as price appreciation moderates in the second half.

As price appreciation slows down, U.S. homebuilders may face some headwinds. Toll Brothers Inc. (NYSE: TOL) missed revenue expectations when it reported earnings last month. The company, which builds homes at the high-end of the market, could dodge some of those headwinds.

Other homebuilders, like PulteGroup Inc. (NYSE: PHM) and D.R. Horton Inc. (NYSE: DHI), may not be as lucky, though both expect the housing market to continue improving. Shareholders have knocked both stocks down more than 30% since mid-May, when mortgage rates started to rise. Toll Brothers shares are down about half as much.

The home improvement stores are doing better. Shares of Home Depot Inc. (NYSE: HD) are down about 5% since mid-May, while shares of Lowe’s Companies Inc. (NYSE: LOW) are up almost 10%. As home values improve, homeowners with equity tend to feel more secure and often begin projects that will keep home values up.

As CoreLogic’s data demonstrates, home values are a local phenomena. The states where the most properties are underwater are Nevada (36.4%), Florida (31.5%), Arizona (24.7%), Michigan (22.5%) and Georgia (20.7%). The states with the highest percentage of homes with positive equity are Montana (96.2%), Alaska (96.1%), Wyoming (95.8%), Texas (95.7%) and North Dakota (95.5%).

Of all mortgaged homes in the United States, 64.4% have at least 20% equity, according to CoreLogic. The average underwater amount for all mortgaged properties is 32.6%. For homes with first mortgages only, 61% are underwater by an average $51,000. For homes with first and second liens, 39% are underwater by an average of $75,000.

If interest rates keep rising, mortgages will be more difficult to get, and as new mortgage rules take effect lending institutions will apply stricter qualifications for borrowers. Home builder stocks may rise, but only slowly. Far more likely is growth in the stocks of the home improvement stores.

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