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Housing's Achilles Heel: Under 40 and Underwater

Meg Handley

With encouraging news about home prices finally rising and sales picking up, it's easy to think that the housing market is finally coming out of the dark ages.

But there's at least one trillion-dollar problem that lingers on: negative equity.

Though rising home values have shaved $42 billion off the nationwide total--about $1.15 trillion, according to the latest data from real estate information site Zillow--millions of Americans still owe more on their mortgages than their homes are worth, also known as being "underwater."

Just shy of 31 percent of American homeowners with mortgages are underwater, according to Zillow, and nearly half of them are under 40 years old. But although a good chunk of that age group has underwater mortgages, they are some of the least likely borrowers to skip payments.

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Why? A lot has to do with how much homeowners are underwater. Though more borrowers under 40 are underwater, their loan-to-value ratios are smaller than their older counterparts.

For instance, underwater borrowers between the ages of 30 and 34 have average loan-to-value ratios of more than 123 percent. That figure jumps to more than 130 percent for borrowers in the 55 to 59 age group. But where only 8 percent of underwater borrowers 30 to 34 are delinquent, 10 percent of 55- to 59-year-old borrowers are.

The more a borrower is underwater, the more likely they are to feel that trying to pay back the loan is futile, says Stan Humphries, chief economist at Zillow, even if they can afford the payment. That tends to result in more strategic defaults, where a borrower walks away from a property allowing it to be foreclosed on instead of paying on a mortgage larger than the home's value.

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Another reason simply has to with a borrower's stage in life. Those under 40 are more likely to have children still living at home, and many are hesitant to disrupt family life despite having an underwater mortgage. Also, younger folks may be less likely to have more expensive or multiple houses, experts say, making them less precariously stretched when it comes to finances.

But economists point out that high levels of negative equity continue to stunt a deeper recovery in the housing market. Would-be sellers are trapped in properties because they can't break even on their mortgages. That in turn has tightened the supply of homes for sale and kept pent-up demand for housing at bay.

"Negative equity is trapping young people in their homes, preventing them from selling," Humphries said in a recent report. "These homes are likely the very starter homes potential first-time homebuyers are seeking."

Meg Handley is a reporter for U.S. News & World Report. You can reach her at mhandley@usnews.com and follow her on Twitter at @mmhandley.

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