“Negative equity is typically a demand-side obstacle to sales and refinances, but currently is also restricting the supply of homes for sale,” Khater said.
In markets where more than half of borrowers are underwater, the average supply drops to 4.7 months, compared to 8.3 months in healthier areas.
As a result of the restricted supply, lower-priced homes in these areas are actually rebounding at their fastest pace since the homebuyer tax-credit “boom” in 2010, according to CoreLogic.
Prices on less expensive homes increased an average 4.5% from one year ago, compared to just a 0.6% uptick at the higher end of the market (click on graph below to expand).
“Paradoxically, as the flow of REOs has slowed over the last 18 months, negative equity has become a positive force in real estate markets by restricting supply in the face of increasing demand,” Khater said. “We have transitioned from pricing dynamics driven by economic weakness and high shares of distressed sales to one of restricted supply, which will likely exist for some time to come.”
This is a tortured, convoluted way of saying that the Law of Supply and Demand works. Negative equity is a result of low prices combined with leverage. Low prices suppress supply. Combine that with leverage and the normal effects are magnified.