Center for American Progress - The Great Recession, which began with the collapse of U.S. home prices in 2007, resulted in an enormous number of households with negative equity. Housing prices dropped nationally by 35 percent during the collapse. As home values fell, the mortgage debt obligations of millions of American homeowners remained fixed, leading to an unprecedented number of homes being worth less money than what was owed on them.
Seven years later, about 7.5 million American homeowners are still underwater. Even though home values have continued to rise and the national percentage of homeowners with negative equity is down from 30 percent in the second quarter of 2011 to 15 percent in the first quarter of 2015, there is still much work to be done in order for the market to fully recover.
The persistence of negative equity imposes significant costs not only on homeowners but also on local communities and the economy at large. When homeowners owe more on their homes than what they are worth, they are unable to draw on home equity to invest in their children’s education or to start small businesses. Homeowners also may curtail their consumption by purchasing fewer goods and services from local businesses, thus curbing employment and income levels. Finally, because of underwater borrowers’ high propensity to default, large concentrations of underwater properties threaten to induce future waves of foreclosures and can contribute to a continuing cycle of decline and disinvestment.