Underwater mortgages are a massive drag on the economy, and it could take years to eliminate the negative equity from many markets.
As the housing market struggles to regain its footing, about 11 million homes are in negative equity, with those homeowners "trapped," said Sam Khater, a senior economist with CoreLogic.
Although most of those people are current on their mortgages, they are unable to sell their homes because they would take too much of an economic hit: on average, about $70,000.
That means people are unable to move for jobs or better jobs. So homeowners are left with three choices: try to negotiate a short sale, accept foreclosure, or stay put, Khater said.
Housing and Urban Development Secretary Shaun DonovanShaun DonovanHouse Dems call on OMB to analyze Senate budget plan Overnight Finance: Dems turn up heat on Wells Fargo | New rules for prepaid cards | Justices dig into insider trading law GOP reps warn Obama against quickly finalizing tax rules MORE said Friday that the administration will unveil two new initiatives this week to prop up the housing market following a spate of bad news this week.
The first is an FHA refinancing plan to help those homeowners with negative equity, he told CNN on Friday for an interview that aired on "State of the Union" on Sunday.
Donovan also said the department is moving forward with a previously announced $3 billion program designed to help unemployed homeowners pay their mortgages.
So far, the federal government's programs to try to help those with negative equity haven't had much impact, Khater said.
"The main problem is that it would require a huge amount of money to get rid of the negative equity, something tough to do in the current environment," Khater said. "Eliminating negative equity would also introduce obvious moral hazards."
Housing experts have argued the latest multi-billion program will only be successful if it helps create equity. If not, the program isn't worth it, said Dean Baker, co-founder of the Center for Economic and Policy Research.
To recover, the economy has to add jobs to help the housing market. Even record-low mortgage rates are like "stimulating a dead corpse," said Anthony Sanders, a member of the Mercatus Center’s Financial Markets Working Group and a professor of real estate finance at George Mason University.
"We have to have job growth to pick up the excess inventory," Sanders said. "Our economy needs to add approximately 150,000 jobs per month."
CoreLogic estimates it will take six to eight years to eliminate negative equity. In hard-hit areas such as Las Vegas, it could take more than a decade.
Negative equity remains concentrated in five states: Nevada, which had the highest percentage of negative equity with 68 percent of all of its mortgaged properties underwater, followed by Arizona (50 percent), Florida (46 percent), Michigan (38 percent) and California (33 percent), according to CoreLogic.
Another problem is that homes with equity are appreciating faster than those that are underwater. The average values of properties with 50 percent or more equity increased more than 1 percent between the final quarter of 2009 and the second quarter of this year. Properties with 25 to 50 percent in equity increased an average of 0.2 percent in that period. However, values fell for every segment in negative equity, with the biggest value decline occurring for properties that are 50 percent or more in negative equity, according to CoreLogic data.
"Negative equity continues to both drive foreclosures and impede the housing market recovery," said Mark Fleming, chief economist with CoreLogic. "With nearly 5 million borrowers currently in severe negative equity, defaults will remain at a high level for an extended period of time."
The Obama administration's main program — the Home Affordable Modification Program — to ease home foreclosures permanently lowered mortgage payments for only 36,695 homeowners in July, the smallest increase since December, administration officials said recently.
During the second quarter of the year, there were a record 269,952 home foreclosures, up 38 percent from the same period a year earlier, according to Irvine, Calif., research firm RealtyTrac.
Rick Sharga, senior vice president at RealtyTrac, has projected that foreclosures will peak next year before they decline.
The rush of bad housing news this week included sales of existing homes dropping to their lowest levels in more than a decade, plummeting by more that 27 percent during July. Also, new home sales fell 12.4 percent in July to the lowest level on record dating back to 1963, despite low prices and mortgage rates.
Besides the obvious financial factors such as uncertainty about the extension of the Bush-era tax cuts, consumers also have become psychologically closed off to the idea of purchasing a home.
“Homeowners are holding on to their overpriced housing, hoping that they won’t get damaged even further,” Sanders said. “There’s been a change in consumer psychology and that is difficult to reverse.”
During the housing bubble, homebuyers were overly optimistic as equity increased and they continued to upgrade their homes.
"People are stuck in that kind of mentality and people don't want to believe it when the market goes down because they have unrealistic expectations," he said. "They're hoping the bubble reappears and no one is facing reality that it won't."
Sanders likened the housing crash to "picking up the pieces of the Hindenburg explosion."
Some homeowners who are under water on the loans are simply giving up, and the problem is worse for those who have lost part or all of their income, he said.
"Everyone is overwhelmed, the losses are so staggering."