Negative Equity: Stage One of Distressed Real Estate Inventory - How to Accurately Measure and Why Looking at Local Data Matters

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Home Value Forecast’s Lessons from the Data examines eight counties in NY and CA including San Bernardino to show variations among markets with negative equity properties

Pro Teck Valuation Services’ (HVF) continues to distinguish the different stages of distress and recognize wide variations in the size and nature of the distressed inventory among local housing markets. This month’s Lessons from the Data presents estimates of the Stage One inventory -- the number of properties with negative equity – for the same eight counties in New York and California that were examined in an earlier article on Stage Three, which are inventories with foreclosed and REO properties.

The counties analyzed were Suffolk, Nassau, Ulster and Westchester in New York; and, Merced, Riverside, San Bernardino and San Joaquin in California. The authors concluded that negative equity was below 5 percent for all eight counties in 2005 but then began to rise rapidly, especially in the four California counties.

“The exact amount of negative equity that leads a borrower to ‘walk away’ or ‘turn in the keys’ to the lender does vary among borrowers,” said Tom O’Grady, CEO of Pro Teck Valuation Services. “A typical pattern is a sharp increase in the probability of default as soon as equity becomes negative, and then it rises more and more steeply as equity becomes more and more negative. If equity is -40 percent of the property value, the probability of default is in excess of 75 percent.”

The authors also computed the size of the inventory with negative equity for each of the 500+ ZIP codes in these eight counties for the same time period. These results confirm the large increases in the share of properties with negative equity between 2007 and 2011 in most ZIP codes.

A main takeaway is the wide variation among the ZIP codes within the county averages. For example, in San Bernardino County, 40.3 percent of the units in ZIP 92392 have negative equity in 2011 compared to only 7.4 percent in ZIP 91709.

The authors also point out that the size of the distressed inventory based upon the Stage One measure – percent of the stock with negative equity – is much larger than one based upon Stage Three (foreclosed). For example, the percent of the housing stock with negative equity in Suffolk County, NY in 2010 was about six times larger than the amount in the foreclosure inventory (2.6 percent versus 0.4 percent). Also, the size of the Stage One inventory continues to rise in the four New York Counties though it has diminished since 2010 in the four California counties. This is due in part to the fact that the declines in house prices in the New York counties have occurred more recently than in the California counties. However, the relatively large size of the Stage One inventory in New York also reflects the fact that foreclosure takes much longer in New York than in California. More generally, these results and those in the earlier article strongly confirm the wide variation among local housing markets in the measure of distress.

“Our expectation is that geographically granular data may be able to shed light on state and local policies that may be helping and hindering the dissolution of the distressed inventory,” said Tom O’Grady, CEO of Pro Teck Valuation Services. “This is especially true in the areas with the largest inventories of distressed real estate and where the external costs of foreclosed and vacant properties are likely the highest.”

Reporters who are interested in the data for the counties mentioned in the Lessons from the Data (in New York: Suffolk, Nassau, Ulster, Westchester and in California: Merced, Riverside, San Bernardino, San Joaquin) or for their reporting area, as well as national, regional or metro level housing data tailored to meet specific story needs, please email your inquiry to

About was created from a strategic partnership between Pro Teck Valuation Services and Collateral Analytics. HVF provides insight into the current and future state of the U.S. housing market, and delivers 14 market snapshot graphs from the top 30 CBSAs.

HVF is built using numerous data sources including public records, local market MLS and general economic data. The top 750 CBSAs as well as data down to the ZIP code level for approximately 18,000 ZIPs are available with a corporate subscription to the service. To learn more about Home Value Forecast and Pro Teck’s full suite of residential real estate valuation products visit us at


Media Contact: Janice Walker, JD Walker Communications, LLC
781-290-6528 or

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