Study of Homeowners Finds ‘Negative Equity’ a Problem : Real estate: Nearly 5% owe more than homes are worth. Impact hinders the state’s economy, experts say.

Nearly 5% of all homeowners in the most populous parts of California now owe more on their homes than their properties are worth, according to a new study that provides dramatic additional evidence of how the state’s housing market has deteriorated in recent years.

Five years of falling housing prices, coupled with the increasing popularity of mortgages with low down payments, have caused slightly more than 300,000 California homeowners to have so-called negative equity, according to TRW REDI Property Data, a real estate research firm based in Riverside.

While some experts said they predicted that the number would be much higher, TRW tracked only those homeowners still paying on their mortgages, not including foreclosures or homes sold at a loss.

The study, scheduled to be released today, is believed to be the first major attempt to track the number of California homeowners who have lost all the equity in their property. The state’s price plunge has been particularly dramatic because it followed huge price increases in the 1970s and 1980s.

“It’s rather frightening,” said Pat Neal, a Garden Grove real estate agent and former president of the California Assn. of Realtors. “This is one of those long-term situations, so if people stay put and don’t panic, they will be OK. This runs in cycles, but we haven’t had a cycle like this in a long time.”

Analysts say the large number of Californian homeowners with negative equity has increased foreclosures, depressed home sales and hindered the state’s economic recovery efforts by dampening consumer spending.

“The negative equity phenomenon goes some way in explaining the current anemic state of California’s housing market,” said Nima Nattagh, an analyst with TRW. In addition to holding back buyers who want to move into more expensive homes, the trend “creates uncertainty about whether homeownership is a worthwhile investment.”

Matthew Barrows is one of those caught up in the financial mess. He recently moved into a new home in Manhattan Beach, but cannot sell the single family house he bought in Hawthorne at the height of the real estate boom in the late 1980s.

To cope, Barrows, 43, is trying to renegotiate his bank loan to lower his monthly payments, and has found renters to live in the home.

“We’re trying to wait this out until things improve, but I don’t know how long we can hang on here,” he said. “We have a negative $40,000 in equity on a home we’ve been paying on for five years.”

The TRW REDI study tracked home purchases statewide since 1991 and compared the percentage that housing values declined annually to the percentage of money put down on a home. The study involved 24 of the state’s 58 counties, representing more than 80% of California’s population.

Southern California’s market had a larger number of people with negative equity than the San Francisco area, where only 2.7% of homeowners have homes with less value than their outstanding mortgage balances, the study found. The number stood at 4.1% in Los Angeles County, 3.1% in Orange County and 4.7% statewide.

Since 1990, home prices have fallen 26% in Los Angeles County and 21% in Orange County, while Northern California has seen declines of about 13%, TRW said.

“Clearly, the steep slide in prices in the early part of the 1990s has caused this development,” said Lynn Reaser, a chief economist with First Interstate Bank in Los Angeles. “But now that home prices have started to stabilize in some places, we may see these loan/price ratios look better. Our view is that this situation will improve.”

Reaser said it was especially encouraging--and surprising--that Los Angeles and Orange counties both posted lower rates than the statewide average.

Still, other parts of Southern California were the worst in the state. San Bernardino County, where 10.7% of homeowners have negative equity, had the highest rate of counties surveyed and Riverside County, with 10.4%, posted the second-highest. Both counties experienced severe declines in home prices in the 1990s.

“I’m not surprised. In fact, I thought it might be even higher. That’s why we’re having all these foreclosures,” said Michael Carney, executive director of the Real Estate Research Council of Southern California, a research group. “Basically, the problem is that the economy is bad and this is a result of that.”

Laura Snow, a spokeswoman for Countrywide Funding Corp. in Pasadena, the nation’s largest mortgage lender, said the negative equity figures are not surprising.

“That number is probably right on the mark,” she said. “This problem encourages people to walk away from homes, which hurts all the properties on a block. It’s a vicious cycle.”

Snow said the best thing homeowners with negative equity can do is try to renegotiate the terms of the loan and just stay put--particularly tough for Californians, who on average move every five years, she said.

“They should wait till things improve. And try to remember it’s only a paper loss,” she said.

But the problem has forced many homeowners into foreclosure, a costly process that takes about four months. Some people also are trying to negotiate “short pays,” in which a lender agrees to accept less than the outstanding balance to settle a mortgage loan when a home is sold.

During a three-year period in the early 1990s, foreclosures grew at least 60% statewide, said TRW. However, the rise in foreclosures did slow dramatically last year to an increase of 13%, TRW said.

Steve Liebeck, a mortgage banker with Ditech Funding in Newport Beach, said many homeowners come into his office to refinance their mortgages and take advantage of near-historic lows in mortgage rates, only to find they are not eligible.

“We could do 100 refinancings a day if the people who came in had enough equity,” he said. “But what we’re finding is that the equity is gone in these properties.”

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Negative Equity

Nearly 5% of homeowners statewide have mortgages that now exceed the value of their homes--a condition called negative equity. The situation in Orange County is less acute than in the surrounding counties. Percentage of homeowners with negative equity: County Los Angeles: 4.1% Orange: 3.1% Riverside: 10.4% San Bernardino: 10.7% San Diego: 4.7% Statewide: 4.7% ****

Prices Head Downward

Orange County’s index of home price changes, a measure of how resale prices compare to original sales price, declined about 20% from the base year 1990 through 1995’s first quarter. How the index has moved: ‘95: 79.62*

* First quarter

Source: TRW REDI Property Data

Researched by JANICE L. JONES / Los Angeles Times