Money exchanged for house

Although seven years have passed since the end of the Great Recession, recovery in the housing sector has been inconsistent across the country. Some places have rebounded and are experiencing growth. Others have not recovered from the subprime and foreclosure crises and continue to struggle with high levels of negative equity—when a house is worth less than its outstanding mortgage debt.

How are these dynamics playing out in the Southeast as compared to other parts of the country, and are there neighborhood characteristics that accompany persistent concentrations of negative equity in the region? Elora Raymond, an Atlanta Fed research assistant and doctoral candidate at Georgia Institute of Technology's School of City and Regional Planning, looks at these questions. Raymond's paper, "Negative Equity in the Sixth Federal Reserve District" examines the level, distribution, and correlated factors of negative equity across the Southeast—specifically in the Atlanta Fed's footprint, comprised of Alabama, Florida, Georgia, and parts of Louisiana, Mississippi, and Tennessee.

Raymond finds that negative equity is highest in the Atlanta Fed's geography as compared to all other Federal Reserve Bank territories. Her research indicates that negative equity is concentrated in urban areas in the locations studied. Of the 10 largest metropolitan statistical areas (MSAs) in the Atlanta Fed District, Atlanta and Jacksonville have the highest prevalence of negative equity. In the Atlanta MSA, 56 percent of zip codes have high levels of negative equity as measured on a national scale. The areas with high levels of negative equity also seem to be spatially concentrated, as shown in the map.

Percent of Homes Underwater by Zip Code, Second Quarter 2015

She also examines how social factors, economic factors, housing market factors, and mortgage finance factors relate to the percentage of homes with negative equity. Raymond notes that racial and ethnic demographic factors remain strongly associated with high negative equity even after controlling for neighborhood income, subprime lending, housing stock quality, the density of foreclosures, and home price declines since 2007. The research finds that the places with persistently high negative equity are in predominantly black zip codes with longer commute times, higher unemployment rates, and high rates of rental vacancy. These issues are critical to community and economic development practitioners, as concentrations of negative equity may be detrimental to the financial health of homeowners and the economic vitality of neighborhoods. Negative equity may prevent homeowners from moving to pursue employment opportunities, thereby impeding their ability to negotiate for higher wages. Further, negative equity may affect households' ability to withstand income shocks as a result of job loss or illness. A concentration of negative equity may have spillover effects at the community level. With limited access to home equity loans and a disincentive to invest money in the home, homeowners with negative equity are less likely to perform home improvements. As such, the appeal and economic vitality of their neighborhoods suffer.

Raymond hopes her paper will provoke further dialogue and research on matters of negative equity and policy responses that address this challenge. In particular, future research may further investigate the impact of access to transportation, maintenance of vacant rental housing, and unemployment in areas with persistent negative equity. In addition, practitioners and policymakers alike may consider leveraging Raymond's findings to understand further the widening racial gap in housing wealth. The Atlanta Fed's Community and Economic Development team will continue to explore this issue through its research and analysis available in this and other publications.