While some forecasters predict Connecticut will see a decline in foreclosures this year, there is still a negative trend hanging over the market that could stall the state’s housing recovery.
The number of homeowners in the state who are under water, meaning they owe more on their mortgages than their homes are worth, remains at elevated levels and will likely lead to high foreclosure rates for the next couple of years, experts said.
That situation could also undercut consumer spending and slow the number of home sales in the state because under water mortgages, or negative equity, make it harder for people to move.
“So long as these people are out there, they are all at risk of foreclosure,” Boston Federal Reserve senior economist and policy advisor Paul Willen told a crowd of mortgage industry professionals Jan. 14 at the New England Mortgage Expo at the MGM Grand at Foxwoods.
Sagging home prices have left about 9 percent of homeowners in the Metro Hartford region under water, according to the latest available statistics from Zillow.com, an online real estate tracker.
New Haven County has about 12.7 percent of homeowners under water, while New London has 15 percent and Stamford has about 9 percent, according to Zillow.
Nationwide, about 22 percent of borrowers are under water. Moody’s Economy.com says that national number is as high as 30 percent.
Although Connecticut’s numbers are lower than the national average, it’s still a cause for concern. That’s because in good times — like before the financial crisis when home prices were continually rising — the rate of underwater mortgages is close to 0 percent, Willen said.
While negative equity isn’t an automatic death sentence for a homeowner, it has a major impact on the market, said Ed Sutton, a broker/owner of Re/Max Flagship in East Hartford. For one thing, it ties owners to their home, especially people who may be looking to move up in the market but can’t sell their property for more than what their mortgage is worth.
“Sellers aren’t selling unless they have to, either because of a death, divorce, or decline in income,” Sutton said. “It’s counter intuitive for people to show up to the closing of their home with a check in their hand.”
Negative equity can also be a drag on consumer spending, said Steven Lanza, an economist and executive editor of The Connecticut Economy. Before the housing bubble burst, many homeowners used their homes as ATMs, Lanza explained, turning some of the equity in their property into cash so they can finance purchases like household improvements. But, when a homeowner has negative equity, that spigot is shut off.
“When people are underwater they are feeling a real pinch in their budgets,” Lanza said. “They are not going to be out there spending lavishly.”
Willen, of the Boston Fed, said the vast majority of people who have underwater mortgages don’t know it and it doesn’t typically become an issue until something else goes wrong, like the borrower loses a job, or experiences a divorce or illness.
The problem is particularly acute in urban and low-to-moderate income communities, especially for anyone who bought their home around 2005 — near the peak of the housing bubble — with little or no down payment.
Or for an investor, negative equity may come into play when rental income doesn’t cover the mortgage.
“If a homeowner is in negative equity and they experience some kind of financial shock, foreclosure becomes a lot more likely,” Willen said.
In 2010, 21,705 properties were hit with at least one foreclosure notice in Connecticut, up 10.3 percent from a year earlier, according to the foreclosure tracking firm RealtyTrac.
Both Willen and Lanza said they expect to see a slight decline in foreclosures in 2011 in Connecticut, although there could be an early surge in the first quarter because of delays caused by the foreclosure freeze late last year.
Sutton said he thinks foreclosures could rise in the state again this year.
On a positive note negative equity in Connecticut has been on a decline and it is not nearly as severe a problem as it is in other states, especially those hit hardest by the housing crisis.
In Metro Hartford negative equity has ticked down to 8.9 percent at the end of August 2010, from 11.4 percent in the first quarter of 2010.
Meanwhile, cities on the West Coast, particularly in California, Nevada and Arizona, face a more acute problem. Negative equity in Las Vegas, for example, is near 80 percent, said Katie Curnutte, a spokesperson for Zillow.com.
Curnutte said borrowers in Hartford have historically made higher down payments on their homes, which helps reduce their chances of experiencing negative equity.
For example, from 2004 to 2007, the median down payment by a Hartford homebuyer was 20 percent. A 20 percent down payment has long been considered typical, but during the height of the housing bubble, many real estate deals were closed with buyers putting down much less and paying higher or adjustable rates on their loan to make up for it.
That’s one factor that helped spur the wave of foreclosures across the U.S. over the past few years.
In 2005, the median down payment for first-time home buyers in the U.S. was 2 percent, with 43 percent of those buyers making no down payment, according to a study by the National Association of Realtors.
Another positive sign is that home prices in the state are starting to tick up slightly.
In 2010, average home prices in Connecticut increased 2.8 percent over the previous year, according to data from Re/Max of New England. But single-family home sales were down 6 percent.
Meanwhile, among houses that found buyers in December, median sale prices rose 1.5 percent to $230,500 from $227,000 a year ago, according to The Greater Hartford Association of Realtors.
