Underwater homes explain part of the unexpectedly strong home price increases we’ve seen in metro Phoenix in 2015.

Zillow estimates that 19% of the Phoenix area homes with mortgages are underwater and separately they estimate that 78% of Phoenix area homes have mortgages on them, therefore, 15% of Phoenix homes are underwater (19% of 78%).

Not many of those 15% are likely to do short sales or walk away now, this late in the game. They’ve likely been underwater since 2008 but they’ve made their payments every month the last 8 years. Why would they decide to do a short sale or walk away now?

My guess is that these are reliable, salt-of-the-earth people who wouldn’t walk away or do a short sale unless their financial circumstances changed and they weren’t able to make the monthly payments. They seem to be willing to make payments on their underwater homes as long as they’re able.

Supply of Homes Reduced 15%

These 15% may want to buy a different home because of changes in their family circumstances – marriage, divorce, new kids, kids move out, a better job – but they don’t want to do a short sale and they don’t want to lose money when they sell so they don’t sell.

The underwater homes effectively reduce the supply of homes for sale by 15% in metro Phoenix. That’s actually a significant reduction and it keeps the supply of homes for sale tighter than it would be otherwise.

Demand for Homes Increasing

On the demand side, the number of people coming out of the foreclosure/short-sale penalty box (AKA, boomerang buyers) is increasing every year which increases the number of people who are able to buy homes each year, if they’re willing.

And so Phoenix home prices are unexpectedly strong this year.