Under 40 and Stuck in Underwater Homes
Life + Money

Under 40 and Stuck in Underwater Homes

iStockphoto/The Fiscal Times

The housing market is starting to improve, albeit very slowly. Sales of existing homes rose 2.3 percent from June to July, the National Association of Realtors reported Wednesday, with the median price climbing 9.4 percent from last year. Sales of new homes edged up 3.6 percent last month to match a two-year high. And the total amount of negative equity in the country declined by $42 billion in the second quarter to $1.15 trillion, according to the latest research from Zillow. The number of U.S. homeowners underwater went from 15.7 million in the first quarter to 15.3 in the second quarter, a 2.5 percent drop.

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But the news wasn't so good for the under 40 crowd. They still need a lifeboat. Nearly half (48 percent) of all borrowers in that age group are underwater – about twice the rate of older borrowers.

“Young homeowners continue to be disproportionately affected by negative equity,” said Zillow chief economist Stan Humphries, in a press release. The situation may actually be helping to tighten housing inventory, as homeowners who might otherwise sell opt to wait for prices to climb back up. “Negative equity is trapping young people in their home, preventing them from selling,” Humphries said. “These homes are likely the very starter homes potential first-time buyers are seeking.” That lack of supply may be nudging home prices higher in many markets, according to Humphries.

Most young homeowners stuck in underwater homes bought at the height of the boom, and since they haven’t owned their home for long, they’ve had less time to pay down the principal. Others were swept up in the wave of subprime lending and took out mortgages with little or no down payment.

The situation could well have lasting effects, both for the homeowners and the broader economy. It may even affect income. “Underwater homeowners find it difficult to sell their home and move, says Curtis Chambers, founder of Chambers Financial Group, a financial advisory firm in Clearwater, Fla. “This may make job relocation more difficult, affecting job opportunities.”

For many under 40 – a population still saddled with college debt – holding mortgages larger than what the market would now dictate can put a crimp in their spending ability. “The fixed cost of debt for this generation keeps them from having the levels of disposable income previous generations had,” says Mackey McNeill, founder of wealth advocacy firm Mackey Advisors in Bellevue, Ky. That creates added drag on the economy.