Monday, March 21, 2011

Decrease in Homes with Negative Equity Similarly Flawed

I read a report issued by Core Logic that the percentage of homes in the US that have negative equity dropped from 23% to 22.5% by the end of 2010 was viewed by many as a positive sign that the real estate market may be turning around and/or that there are fewer homes in distress for both now and the future. The one half of one percent decline was a result of the fact that there were 200,000 fewer homes in the US that have negative equity.

The report is actually statistically a bad omen. Here is why (I am donning my Ph.D. hat now instead of lawyer costume). There were one million homes that entered foreclosure in 2010. Statistically, virtually all of them had negative equity (arguably not all of them). Once a home goes into foreclosure, the home is no longer considered to have negative equity (because in most cases, the debt has been written down etc).

Accordingly, the report is clearly misleading since it appears that 200,000 homes have been removed from the negative ranks when in fact one million homes with negative equity were removed from consideration. The 200,000 homes statistic is a misnomer. But is it is actually worse...

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