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36 RESEARCH SHOWS PERCEIVED NEGATIVE EQUITY IS HURTING THE HOUSING MARKET Fannie Mae's Economic, Strategic & Research (ESR) Group pointed out on multiple occasions that housing market growth has been slowed by tepid growth of household income. In a new analysis released in early August, the Fannie Mae ESR Group announced homeown- ers underestimating their home equity may also be a factor in weighing down housing markets. e commentary was written by Steve Deggendorf, director of business strategy for Fannie Mae's ESR Group, and Professor James A. Wilcox of the Haas School of Business at University of California, Berkley. e National Housing Survey from Fannie Mae contains data that suggests homeowners who are underestimating how much equity they have in their homes may also be underestimating in other areas, such as how large of a down payment they could make with that equity; their chances of qualifying for a mortgage, assuming they need a large down payment; and their opportunities for selling their house and buying another one. Fannie Mae's National Housing Survey com- pared the percentage of homeowners who per- ceived they were underwater on their mortgages with the share of homeowners who were actually underwater as reported by CoreLogic. Fannie Mae offered survey respondents five choices for their total mortgage debt ranging from at least 20 percent more than the value of the home to at least 20 percent less than the value of the home, and found through the end of 2011, the percent- age of respondents with a mortgage who thought they were underwater was an average of 6 per- centage points higher than the share estimated by CoreLogic. e 20 percent spike in home prices from 2012 to 2014 reduced CoreLogic's estimate of the share of underwater borrowers from 21 per- cent down to 9 percent during that period, the authors said. But in the Fannie Mae NHS, the share of homeowners who perceived they had negative equity fell by only 3 percentage points from 26 percent down to 23 percent for that same period despite the large increase in home prices. "Surprisingly, then, the significant rise in house prices was not perceived to lift many homeowners above water," the authors said. Fannie Mae's NHS found the percentage of borrowers who were "above water" also perceived lower equity gains than CoreLogic's estimates. For example, in June 2010, the first month Fannie Mae conducted the survey, the NHS reported 32 percent of respondents perceived themselves to have significant home equity, com- pared to CoreLogic's estimate of 53 percent for the same month. at gap has widened as home prices have risen, according to Fannie Mae; by the end of 2014, only 37 percent of NHS respon- dents believed they had significant equity in their homes, compared to CoreLogic's estimate of 69 percent. "CoreLogic's estimates reflect that rising house prices not only lifted many homeowners above water, but also lifted many homeowners into having significant home equity," the authors wrote. "Despite the significant rise in house prices after 2011, the percent of homeowners who perceived they had significant home equity was almost unchanged—just as the percent who perceived they were underwater was almost unchanged. e 37 percent of homeowners who perceived at the end of 2014 that they had signifi- cant home equity had edged up only a little from its 2011 average of 35 percent." e authors offered as a possible explanation for the divergence that a substantial group of homeowners may not recognize the rising value of their homes after 2011—and even if they had recognized increasing home values, they have still underestimated how much the values and equity increased during that time. Other data from the NHS suggested misper- ceptions on the part of homeowners as to how much home prices had increased. Respondents in the NHS said during the third and fourth quarters of 2013 they believed home values rose in the previous 12 months by 2.2 percent and 2.7 percent, respectively. e national FHFA home price index for that period showed home prices rose by 8.2 percent and 7.6 percent, respectively. "ey perceived only about one-third of the actual percentage increases, in this case implying that, on average, they did not perceive additional home equity equal to 5 percent of their homes' values," the authors wrote. e authors said the private sector or public sector could provide information and tools that would shrink the appreciation gap, which is geared to help homeowners have more accurate estimates of their home equity. "Better appreciating how much their assets have appreciated ought to strengthen home- owners' demand for housing, as well as their demands for other goods and services," the authors wrote. "us, in addition to the op- portunity to help homeowners on an individual basis, shrinking the appreciation gap presents a potential opportunity to speed up the recovery of the housing and mortgage markets, better match workers with jobs, and strengthen the economy generally."

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