Continued decreases in property values has resulted in what economists describe as "Negative Equity". The following report in the Wall Street Journal discusses this concept and the consequences.

Housing Rests On a Negative Equity Problem 

Amid the hand-wringing about complicated credit turmoil lately, the economy's fate still hangs largely on something simple and understandable: the value of your home. When housing stabilizes, consumers and banks will be able to breathe easier about their balance sheets and start thinking about the future. Yet deeper housing risks loom.

Sales of previously owned homes fell 21% in the fourth quarter from a year earlier. Prices declined in 77 out of 150 metropolitan areas, says the National Association of Realtors.

As prices fall, more homeowners are finding they owe more on their mortgages than their homes are worth. Economists call this "negative equity." The problem with negative equity is that it gives people an incentive to walk away from their homes and their mortgages, making the debt the problem of the banks.

Some homeowners did that in Texas in the 1980s. It is hard to prove it's happening now to any large degree. But many bankers see it as a problem.

Wachovia and Bank of America executives have pointed to the trend, as does Fitch Ratings. In Las Vegas, half the homes listed for sale are vacant, according to Ivy Zelman, an independent housing analyst. Many of these homes were originally bought by investors. They thought they were getting an appreciating asset and have little attachment to the homes now.

It is easy to imagine how walkaways could lead to an insidious process, putting more downward pressure on prices, and in turn giving more homeowners an incentive to pack their bags and leave their keys in the mailbox for the bank.

Goldman Sachs Chief Economist Jan Hatzius estimates home prices will slide 10% nationwide in 2008, meaning 15 million mortgages, 30% of all outstanding, will be attached to negative equity. That implies about $3 trillion worth of mortgages could be worth more than the homes they finance, he says.

These are scary numbers from a bearish economist who might be proven wrong. But given the risk, it's no wonder Federal Reserve Chairman Ben Bernanke has left the door open to more rate cuts aimed at healing an economy with lots of downside risks.

To view the online article, please click here.

About Safeguard
Safeguard Properties is the largest privately held field services company in the country. Located in Cleveland, Ohio and founded in 1990 by Robert Klein, Safeguard has grown from a regional preservation company with a few employees and a handful of contractors performing services in the Midwest, to a national company with over 450 employees. Safeguard is supported by a nationwide network of subcontractors able to perform any requested superintendence, preservation, and maintenance functions, as well as numerous ancillary services in the U.S., the Virgin Islands, and Puerto Rico.