FedFocus Little Rock: St. Louis Fed Economist Discusses

LITTLE ROCK, Ark. — Arkansas has fared better than the U.S. as a whole when it comes to homeowner equity, according to St. Louis Fed economist and assistant vice president William Emmons.

“Overall, Arkansas is in much better shape than other states, but foreclosures will continue here, too—especially if house prices fall and unemployment increases,” said Emmons during a recent presentation on “Housing’s Great Fall: Putting Household Balance Sheets Together Again”, at a FedFocus luncheon hosted by the Federal Reserve Bank of St. Louis-Little Rock Branch  on June 29, 2010.

Emmons discussed the role declining housing prices and homeowners' equity have in mortgage foreclosures, and said that in Arkansas, only 12.3 percent of homeowners have negative equity versus 23.7 percent nationwide. However, 6.2 percent of homeowners in Arkansas have near negative equity versus 4.9 percent for the nation as a whole.  

In his analysis, Emmons found that the nation’s foreclosure crisis was largely a result of negative homeowner equity. He noted that by the first quarter of 2009, U.S. homeowners had lost almost $5 trillion of homeowners’ equity, even though house values had only fallen about $4 trillion. 

This decline in equity reflected the impact of falling house prices amid a continued rise in mortgage debt. As a result, many homeowners found themselves holding loan balances greater than the value of their home, which put these homeowners at greater risk for foreclosure and default in the event of an adverse life event such unemployment, illness, etc..

 “Addressing the issue of negative homeowners’ equity is critical to stemming the foreclosure crisis,” said Emmons. “The foreclosure crisis is likely to continue through 2010 and beyond as house prices and homeowners’ equity will probably not increase and incomes will remain stagnant.”

For more information about Emmons’ research into this topic, see his corresponding article published in the October 2009 edition of the Regional Economist.