Will Underwater Homeowners Lead to Higher Prices?

Underwater homeowners are contributing to a lower inventory of houses for sale on the market, but according to Capital Economics negative equity will not have a major impact on housing prices. Regardless of the impact of negative equity, both ""Capital Economics"":http://www.capitaleconomics.com/ and the ""National Association of Realtors (NAR)"":http://www.realtor.org/ foresee rising prices in the near future.

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The percentage of underwater homeowners is falling but remains elevated. In total, about 11.4 million homeowners were underwater in the first quarter of this year, according to ""CoreLogic."":http://www.corelogic.com/ This portion of homeowners makes up 23.7 percent of residential properties that currently have mortgages.

During the previous quarter, about 12.1 million homeowners were underwater, about 25.2 percent of the market, according to CoreLogic.

Additionally, CoreLogic reported another 2.3 million homeowners have ""near-negative equity,"" or less than 5 percent equity in their homes. Combined with negative equity homeowners, these homeowners make up 28.5 percent of the market, as of the end of the first quarter of this year.

On the other hand, NAR suggests just 15 percent of homeowners

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are underwater, according to its ""May Pending Home Sales Index."":http://www.realtor.org/news-releases/2012/06/pending-home-sales-up-in-may-continue-pattern-of-strong-annual-gains

Having peaked at 4 million homes in July 2007, according to NAR, inventory is now at about 2.5 million, or a 6.6 month supply.

Inventory ""is now at or even a touch below historical norms,"" ""Paul Diggle,"":http://www.capitaleconomics.com/staff/property-economics/paul-diggle.html property economist at Capital Economics told _MReport_.

Both NAR and Capital Economics suggest this decline in inventory can be attributed to negative equity.

""The reluctance of homeowners who are in negative equity to sell their homes and realise a loss is one explanation for the sharp fall in the visible inventory over the past few years,"" Capital Economics stated in a recent press statement.

However, the reluctance of underwater homeowners to sell their homes and move ""is also acting, broadly speaking, as an equal and opposite crimp on demand,"" which leads Capital Economics to conclude ""the net effect of negative equity on the house price outlook is probably fairly muted.""

Regardless, Diggle ""anticipate[s] recent improvements in demand continuing into the second half of this year and into 2013,"" largely due to investor interest.

On the other hand, a spokesperson for NAR told _MReport_, recent declines in unemployment will bring buyers off the sidelines as they gain the ability to purchase homes and become more confident in their personal economic situations.

Regardless, both Capital Economics and NAR anticipate rising prices this year and next.

Diggle suggests prices will increase by 2 percent this year and by up to 5 percent in 2013. NAR's estimates are a little higher. The trade group expects a 3 percent rise this year and a 5.7 percent rise in 2013.