This week we found out that the negative equity rate for 2013 homeowners was below 20 percent for the first time in years, according to Zillow. Negative equity is when a house is worth less than the mortgage amount – commonly referred to as underwater.

One year ago, 27.5 percent of all homeowners with a mortgage were underwater. So it’s great that we’re down to 19.4 percent, however it’s not as wonderful as it sounds. Nationally, there are still close to 10 million homeowners who owe more than their homes are currently worth. That’s a large number, so what’s the problem?

Home prices aren’t rising as fast

One reason the number of underwater homeowners isn’t lower is because home prices aren’t rising at the rate they were. We saw home prices jump up over the last year, but not enough to compensate for what’s going on in the housing market. This is especially true for certain areas of the country.

The negative equity rate and effective negative equity rate is still extremely high in some areas

Even though the negative equity rate is below 20 percent nationally, some areas are still severely high. Atlanta, Las Vegas and Chicago all had a negative equity rate of between 30 and 35 percent at the end of 2013. So things aren’t improving much for those areas, and the effective negative equity rate, homeowners with less than 20 percent home equity, is even worse.

If your house is worth close to what your mortgage is, that’s considered effective negative equity. Reason being, when there is little equity in a home, selling or buying a new home requires many costs and those people would most likely end up underwater. Listing a home for sale and buying a new one typically requires 20 percent equity or more to comfortably meet the related costs, according to Zillow.

The effective negative equity rate in Atlanta is 54.1 percent, which means more than half of homeowners are effectively underwater with their mortgages. That’s a shocking number and it makes it difficult for the Atlanta housing market to improve.

The IRS forgiveness for phantom income went away

At the end of 2013, the IRS forgiveness for phantom income went away for a primary residence. Before it was like a get out of jail free card. If you were underwater with your primary residence and sold it, or it went into foreclosure or a short sale, and there was deficiency or debt, the lender and the IRS forgave the deficiency. But as of January 1, 2014 that IRS provision went away. Deficiencies will now be treated as income and there will be tax to pay on that forgiveness.

Fewer homes are being put on the market and inventory is low

Fewer homes are being put on the market across the country. Lawrence Yun, the Chief Economist and Senior Vice President of Research at the National Association of Realtors, believes pending home sales are really trending down, and there won’t be a lot of new construction.

It’s not as drastic as 2008 and 2009, but home sales are falling off a cliff and the trend lines aren’t looking very positive. Some places are doing great, such as New York City. But there are many other places around the country that have very low home sales and construction.

The truth is we can’t have a robust real estate market if there’s nothing for buyers to buy. It won’t even matter if there are a lot of buyers and historically low interest rates.

Inventories are also very low. Many homebuilders and companies are having trouble getting money from the banks to build new homes. The number of homes that are being built is nowhere near where it should be.

WSB Radio’s Ilyce Glink Show – March 2, 2014

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