Despite rising home values that are freeing homeowners from negative equity, nearly half of all homeowners under 45, many of whom have young, growing families in need of more space, are still frozen in place because they are underwater on their mortgages.

New data released today by Zillow show that younger homeowners are more susceptible to negative equity than older owners. Some 46 percent of homeowners under the age of 40 are underwater and slightly more than half (50.8 percent) of those aged 30 to 34 are underwater. Yet younger owners between the ages of 20 and 45 are more likely to be current on their mortgages compared to older homeowners.

Zillow reported that negative equity declined in the second quarter, with 30.9 percent of U.S. homeowners with mortgages – or 15.3 million – underwater. That was down from 31.4 percent of homeowners with mortgages, or 15.7 million, underwater in the first quarter. Zillow said the total amount of negative equity in the country declined by $42 billion in the second quarter to $1.15 trillion.

Of the 30 largest markets tracked by Zillow, negative equity fell the most from the first to the second quarter in the Phoenix metro (from 55.5 percent to 51.6 percent) and the Miami-Ft. Lauderdale metro (from 46.4 percent to 43.7 percent). The Las Vegas metro continues to see the highest negative equity rate, with 68.5 percent of borrowers underwater. That was down from 71 percent in the first quarter.

“Rising home values in the second quarter caused a decline in the number of underwater borrowers, but young homeowners continue to be disproportionately affected by negative equity,” said Zillow Chief Economist Dr. Stan Humphries. “We hear about tight inventory in many markets, and it’s clear where this is coming from. Negative equity is trapping young people in their homes, preventing them from selling. These homes are likely the very starter homes potential first-time homebuyers are seeking.”

The vast majority of homeowners who are able to move up- some 71 percent- are married couples and the leading reason that homeowners buy a new home is for more space. Last year one out of five families with children moved to larger homes because they need the space, according to the National Association of Realtors.

Negative equity is a major cause of the housing depression because it makes owners with mortgages vulnerable to foreclosure and reduces household wealth used and assets for retirement other purposes. It has also been recognized as a major factor contributing to reduced home sales and lower inventories by freezing owners in their homes so that they cannot sell.

The negative equity totals in the Zillow report differ from CoreLogic’s recent finding (Rising Values Push Nearly One Million Homeowners Above Water) that only 23.7 percent of homeowners with a mortgage are now underwater because Zillow uses current outstanding data on loan balances on all mortgages from TransUnion, while other reports estimate current outstanding loan balance based on the most recent loan on a property (i.e., the original loan amount at time of purchase or refinance). Both Zillow and CoreLogic, however, reported similar, significant declines in negative equity during the first half the year as home prices stabilized and values improved in many markets.

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The last earnings reports from homebuilders like Toll Brothers (TOL) and KB Home (KBH) have delivered very positive outlooks on the current housing market: see “A Swell Of Pent Up Demand Supports The Surge In Toll Brothers” and “KB Home Going ‘On Offense’ As Its Housing Markets And Pricing Power Strengthen.”

The latest housing price data from the Federal Housing Finance Agency (FHFA), released August 23, seem to corroborate this bullishness. The FHFA report shows what looks like a firming in pricing power for sellers. If this bottoming in prices is sustained, then the housing market is well on target for the bottom in 2013 that I have anticipated since 2009 (for example, see 2010 article “Still Expecting Housing to Bounce Along the Bottom Until 2013“).

According to the FHFA data, the first and second quarter of this year delivered the first year-over-year increase in the seasonally adjusted purchase-only house price index ()HPI)( since the first and second quarters of 2007. The second quarter registered a 1.3% inflation-adjusted price increase. Forty-three states experienced price increases. The two FHFA charts below show a distinct stabilization in prices. The chart of price changes shows an encouraging pattern of higher highs and higher lows that signifies a sustained trend upward from the bottom. The price index indicates downward momentum came to a screeching halt last yearת with 2012 building off that base.

(click to enlarge)

FHFA HOUSE PRICE INDEX HISTORY FOR U.S.A.: Seasonally Adjusted Price Change Measured in Purchase-Only Index

(click to enlarge)

Monthly House Price Index for U.S.A.: Purchase-Only, Seasonally Adjusted Index, January 1991 – Present

(Download data here)

The FHFA also released its new “distress-free” measures for the purchase-only HPI. As the FHFA explains:

“The Highlights article in the 2012Q1 HPI release noted that FHFA was evaluating various options for producing “distress-free” house price indexes. These indexes would remove the effect of short sales and real estate owned ((REO() transactions (bank sales of foreclosed property) from the HPI. The article indicated that, in some situations, distress-free measures might be less noisy than the traditional HPI and might provide more relevant measures of changes in house prices.”

The FHFA uses three databases to construct this new measure of housing prices:

“…To identify short sales and REO sales in this analysis, three different databases are being used. The…mortgage performance data from the Enterprises and FHA comprise the first database. As indicated earlier, these data can be used to directly identify mortgage distress and REO sales where the sellers had Enterprise or FHA loans…

The second database includes information on foreclosure deeds recorded at county recorder offices. FHFA has licensed county deed recordations from DataQuick Information Systems for many counties throughout the country and, because the foreclosure process often culminates with certain types of deeds being recorded, deed information can be used to flag REO sales…

The third database that can be used is a dataset FHFA recently licensed from CoreLogic. The dataset includes specific types of earlier-stage foreclosure filings that have been recorded at county recorder offices. In many jurisdictions across the country-including many counties in the twelve metropolitan areas analyzed here-certain types for formal notifications must be filed at the county recorder offices before the final phases of foreclosure can be completed.”

I like this measure because it can provide more supporting evidence for the sustainability in price changes. For example, if the distress-free HPI is bottoming along with the full sample, then I can assume that distressed homes are having a lower impact on pricing. This of course says nothing about the potential future changes in inventory of distressed homes.

A new report released today by the National Association of Realtors (NAR), sales of existing homes rose in July even with constraints of affordable inventory, and the national median price is showing five consecutive months of year-over-year increases. Monthly sales rose in every region but the West, where inventory is very tight.

Total existing-home sales, which are completed transactions that include single-family homes, townhomes, condominiums and co-ops, grew 2.3 percent to a seasonally adjusted annual rate of 4.47 million in July from 4.37 million in June, and are 10.4 percent above the 4.05 million-unit pace in July 2011.

Lawrence Yun, NAR chief economist, said housing affordability conditions are very good.  “Mortgage interest rates have been at record lows this year while rents have been rising at faster rates.  Combined, these factors are helping to unleash a pent-up demand,” he said.  “However, the market is constrained by unnecessarily tight lending standards and shrinking inventory supplies, so housing could easily be much stronger without these abnormal frictions.”

NAR is asking the government to expeditiously release the foreclosed properties it owns in inventory-constrained markets.

Given population and demographic demand, Yun said existing-home sales could be in a normal range of 5 to 5.5 million if all conditions were optimal.  “Sales may reach 5 million next year, but it will require more sensible lending standards and stronger job creation to push beyond that,” he said.

According to Freddie Mac, the national average commitment rate for a 30-year, conventional, fixed-rate mortgage fell to a record low 3.55 percent in July from 3.68 percent in June; the rate was 4.55 percent in July 2011; recordkeeping began in 1971.

“Fewer sales in the lower price ranges are contributing to stronger increases in the median price, but all of the home price measures now are showing positive movement and that is building confidence in the market,” Yun said.  “Furthermore, the higher median price naturally means more housing contribution to economic growth.”

If you have recently left the real estate market with a home that failed to sell, it is time for you to make a tough decision.

The wave of foreclosures that has been forming in the sea of distressed properties in Tallahassee will be hitting the market soon, and the competition will be far too fierce for people who are trying to pull equity from their homes. The race is on to beat them to the market.

The one thought you do not need to have is whether or not to wait until next year. A home that failed to sell this year will very likely fetch far less money next year than it would have brought in today’s real estate market, as banks dump inventory with liquidation pricing.

No, the real decision is whether to immediately sell a home that failed to sell previously, or to decide to put the sale off for five or more years.

Marketing A Home That Failed To Sell

Marketing a home that failed to sell during a recent effort in the Tallahassee MLS requires more effort than marketing a home that is new to the market. Why?

Because the home has been rejected by the real estate agents in the market.

You might be wondering “Why is my home not selling,” but real estate professionals have already moved on to the thousands of others homes available. The key to marketing a home that failed to sell is to make it “new” all over again.

This takes a lot of daily work to put the property in front of people who are ready to make a buying decision.

Selling A Home That Failed To Sell

So the race is on. Foreclosures are going to be rolling into the market heavily for several years. Banks must liquidate, thus they will be lowering prices to sell-out the inventory.

These offerings for buyers are in direct competition with anybody putting a home on the market, so the best thing to do is make a choice. Sell your home fast, or plan on waiting out the market for five or more years.

If you own a home that failed to sell during a recent marketing attempt, just drop me a note and we can schedule a time to help you review your specific situation and help you evaluate your options.