Prices Up – Negative Equity Down – Good?

Two articles this week, one at NuWire.com and the other at MortgageNewsDaily.com are talking about rising home prices and fewer homeowners in negative equity (underwater) situations. Over at NuWire, the negative equity rate is said to have dropped under 20% for the first time in years.
The rate of homeowners underwater in their mortgages fell last month to 19.4%. 9.8 million homeowners still remain underwater in their mortgages. However, negative equity has fallen for seven consecutive quarters. Approximately 3.9 million homes exited negative equity situations during this period.
The straight analysis of equity to mortgage leaves out the costs of selling a home however. In reality, with closing costs and real estate commissions considered, there are still 37.6 percent of homeowners underwater. Negative equity, though falling, is still about four times higher than in a healthy housing market. According to Zillow.com, home prices rose 6.6% in 2013, the largest contributing factor to the drop in negative equity.
In the article over at Mortgage News Daily, RealtyTrac’s statistics about institutional investor involvement in home price increases is discussed. The report from RealtyTrac defines an institutional investor as entities purchasing ten or more residential properties in a calendar year. In January, these investors accounted for 5.2% of home purchases, down from 8.2% from a year earlier. In all of 2013, institutional investors purchased 354,000 properties, around 7.4% of the total. Over the last three years, institutional investors purchased 850,000 units.
If specific areas are selected, institutional investors are still accounting for more than 20% of purchases, remaining a significant force in home price appreciation. RealtyTrac broke out results for 1,264 counties, providing these data points:
• All counties considered, between 2011 and 2013, home prices appreciated by 14% while rents rose by 7 percent.
• In 14 counties where institutional investors accounted for 20% or more of purchases, prices rose 31 percent on average, and rents only rose by 6 percent.
• In 88 counties accounting for 12 percent of population, the average home price increase was 23% and rents were up by 5%.
This data indicates that institutional investors have either been really good at choosing the right markets, or they have been a major influence in home price increases. The question is whether, as institutional investment buying drops off, will we see prices start to do the same?