Intero Insider: Underwater Loans Helping to Push Up Prices in Some Markets

An upside to underwater homeowners? Apparently underwater loans are credited as a cause of home price increases in markets nationwide. This conclusion seems like a stretch – until you dig into the reasoning and data a bit.

A data report from CoreLogic this month shows that home prices are trending upward in markets with tightening inventories. The data provider goes on to find a correlation between markets with tightened inventories and underwater mortgages.

In other words: underwater homeowners who otherwise would be prime candidates to sell and move up instead are staying put because they don't have enough equity to sell.

In some circumstances, these owners could try the short sale avenue. But even in that case, the ones who sell short are not going to be able to get another home loan for a few years because of the blemish to their credit history. For some families, that makes a short sale unattractive. They'd rather live in their home and wait it out than deal with a short sale, an attack on their credit and years of renting afterward.

According to CoreLogic, home prices, including distressed sales, increased 1.1% in April from the previous year and were up 2.2% from March. It was the first time two consecutive year-over-year increases occurred since June 2010, and it was the second monthly increase this year. The data provider expects home prices to increase another 2% from April to May.

CoreLogic points out that the national supply of homes for sale was down to 6.5 months in April, a level not seen in more than five years. CoreLogic's Chief Economist Mark Fleming is quoted as saying the squeeze in inventory was "in part driven by the 'locked in' position of so many homeowners in negative equity."

Maybe this is just what we needed to boost values a bit and rev up the housing engine in markets that have been hurting.  After all, I learned in my Econ 1A course in college that price is derived from the changing relationship between supply and demand.  Otherwise, this could be the spark that puts more emphasis on initiatives to help homeowners with negative equity modify their loans.

Are you seeing this happen in your market? Is inventory getting squeezed because the important move-up buyer segment is staying put due to negative equity in their current loans?