Almost 30% of California Homeowners Have Negative Equity

The economic snowball effect is reaching the pace of an avalanche. First it was bad loans putting pressure on home prices and now unemployment is adding to the downturn. The circle is vicious as unemployment fuels the borrowers to miss their payments and the bad loans have spooked banks from lending to business so they cannot hire new employees.

Negative equity is when your loan balance is higher than the current value of your home. Generally speaking if a borrower put down 20% to purchase their home and they are in a negative equity position they still will make their mortgage payment as they feel that they have something to lose...even though currently it has already been lost. On the other hand borrowers who put little to nothing down are not financially attached to their property and can walk-away knowing that it was not their money that was lost.
With unemployment at over 10% in California and rising it looks like this avalanche is going to continue for sometime. These indicators would lead one to believe that prices will continue to fall.
I am taking a more positive approach. My feelings are that investors who have been on the sidelines for years are about to come out and purchase. Investors will purchase when they can buy with 20% down and have the rent cover the expenses. We are at that point on many properties listed today.
I also believe that a person who is looking to buy a primary residence should not be overly worried about what is going to happen over the next 12-months. If a home buyer has a horizon of 7 plus years then they can easily ride out any short term drop in prices and will reap the benefits of appreciation. Nobody knows when the bottom of the market is until it has passed. Hind site will always be 20/20.

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