U.S. Homeowners Underwater

Deutsche Bank and the Wall Street Journal are out with some numbers that paint a grim picture of the negative equity position of the nation’s homeowners. The numbers don’t add up precisely but the implications are pretty much the same.

From the WSJ:

Some 24% of owner-occupied homes had mortgage debt that exceeded the values of those homes at the end of June, according to data from Equifax and Moody’s Economy.com. That number rises to 32% when looking at the share of homeowners with mortgages that don’t have equity left in their homes.

Overall, 16 million homeowners are “upside-down” on their mortgages, up from 10 million, or 15% of owner-occupied homes, one year ago.

Nearly 10% of owner-occupied homes now have mortgage debt with loan-to-value ratios of at least 125%, and roughly half of those homes have mortgage debt with loan-to-value ratios of 150% or more.

And they furnish this handy chart so you can see where your state stands:

State	% Underwater
Nevada	40%
Arizona	37%
California	33%
Colorado	31%
Michigan	29%
Idaho	30%
Minnesota	28%
Georgia	29%
New Hampshire	28%
Ohio	26%
Utah	26%
Alaska	28%
South Dakota	27%
Missouri	26%
Indiana	25%
Wyoming	28%
Washington	25%
Iowa	23%
Nebraska	22%
Florida	27%
Montana	25%
Massachusetts	24%
Oregon	23%
Virginia	22%
Kentucky	23%
Rhode Island	22%
Maryland	20%
North Carolina	22%
Illinois	21%
Kansas	19%
New Jersey	20%
Tennessee	20%
Connecticut	20%
Maine	21%
Texas	20%
Vermont	20%
South Carolina	22%
New Mexico	22%
Alabama	21%
Wisconsin	19%
Delaware	19%
Arkansas	20%
District Of Columbia	20%
Pennsylvania	17%
Oklahoma	17%
Hawaii	18%
North Dakota	16%
New York	18%
Mississippi	17%
Louisiana	16%
West Virginia	13%

Meanwhile, Bloomberg has an article citing numbers released by Deutsche Bank:

Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Deutsche Bank AG said.

The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in a report today.

As of March 31, the share of homes mortgaged for more than their value was 26 percent, or about 14 million properties, according to Deutsche Bank. Further deterioration will depress consumer spending and boost defaults by borrowers who face unemployment, divorce, disability or other financial challenges, the securitization analysts said.

“Borrowers may also ‘ruthlessly’ or strategically default even without such life events,” they wrote.

We could quibble with the inconsistencies between the two stories but that would be missing the point. Here are some of the implications:

• Labor mobility is significantly reduced.
• Residential real estate markets remain dysfunctional for an extended period as owners are trapped in existing housing.
• Historically high levels of foreclosures become chronic as a certain percentage of underwater owners inevitably face life altering events.
• Consumer demand is reduced as owners try and save their way out.
• New residential lending is constrained by concerns about equity values.

Feel free to add your own. These are just some that pop into my mind.

I would add that even if Deutsche Bank’s projections are wrong, the current situation is one that will most likely act as a brake on economic growth for a number of years to come.

Comments

[predictorma...:]

Apparently divorice stats have been altered also.

During the boom couples realized they had enough equity to divorice, sell and even with each having half they could each have enough to purchase a home. This increased divorice rates.

Now couples that want to get divoriced cannot get out of their house either with enough to restart or they are underwater and don't have the cash to make up the difference. They are making do living together, albeit totally unhappy about the situation. So now divorice rates are down.

Aug 06 09:21 AM

[john s. gordon:]

interesting to see that the usual suspects NV AZ CA are @ the top o' the list. this is where the speculative buyers (anticipating a profitable flip) were most active & the shady lenders were most accommodating.
> jack

Aug 06 09:24 AM

[mkttrdr:]

Thanks for the confirmation, Tom and SA.

This adds proof that this downturn is far from over. Consumer debt and housing were the bubbles, now it's up to the consumer to carry us out by spending more on goods and services(70% of gdp). I Just don't see that happening when you have high unemployment, credit strap citizens, lack of equity and little savings, an aging population, taxes and fees everywhere etc... The printing of money and the creation of more debt will bite us back in the end.

Aug 06 12:25 PM

[RSAAKS:]

All such dooms day scenarios are not able to imagine the power of printing money, which will devalue the debt. In 10 years, dollar could be worth half in buying power, but twice as strong in debt repayment power (assuming of course that interest rates will stay low-and I think they will). High inflation and low interest rates is not a common phenomenon, but we will see it for 8-10 years, and that is how we will bring propsperity back. I can hear all the deflation folks growling already...

Aug 06 12:41 PM

[cadoggy:]

I think the commonly used definition of underwater is too optimistic. Most people describe it as having a loan balance greater than the fair market value of the home.

When you factor in the absurd costs of selling a home and then presumably buying another one to live in, a homeowner can easily eat up 10% of the current home's value.

Even before the bubble I've argued that the real estate industry is overpaid as a whole. Forbes Magazine listed Real Estate Agent as the top paying job not requiring a college diploma! We need to reform this in order to improve the mobility of the American workforce.

Aug 06 01:39 PM

[Mad Hedge F...:]

Man the buckets! Deutsche Bank has put out a report on residential real estate that will raise the hair on the back of your kneck if you still own your own home. Prices have not hit bottom and have another 14% to fall by 2011, putting in a 42% fall from top to bottom. By then, almost half of all mortgage holders in the US will be underwater. The top underwater cities in the US is not good news for the Land of Fruits and Nuts, where lending was the most aggressive and imaginative:

Merced, CA 85%
El Centro, CA 85%
Modesto, CA 84%
Las Vegas, CA 81%
Stockton, CA 81%

The murder weapons in these nearly home equity free cities break out as the following:

Option ARMS 89%
Subprime 69%
Alt-A 66%
Jumbo 46%
Conforming 41%

These forecasts tell us that a second stimulus package is a sure thing, that unemployment will soar over 10%, and that a “W” shaped recession is a lock. Gee, do you thing the stock market might go down on this?

Aug 06 04:32 PM

[JPDX:]

Anyone who bought a house in a monoculture of subdivided homes or condos should be worried. It'll likely be 30 years before they get to break even again. If you're in a great location and own a nice unique home with privacy or a view you will be just fine.

Aug 06 06:25 PM

[keithfeather:]

"housing" decline seems to actually be a "land speculation" decline, which, when the folks in CA and FL have been getting mortgages where the land is valued at several million an acre, can fall a lot. Maybe a 1/5 acre of residential land in San Jose is worth $1.5MM, but it could just as easily be worth $100K tomorrow. Fun on the way up, not so fun on the way down.

Aug 06 07:25 PM

[Tack:]

It's humorous to read serious references to "labor mobility," as if this were a genuine problem. It just reflects that everybody's far too ready to list new insoluble problems caused by the current downturn, without stopping to think about the illogic of it all.

If house-sale stagnation were actually causing a "labor mobility problem," then, labor would be made more scarce and valuable, thus driving up the relative value of a qualified employee and making it more perilous for an employers to layoff somebody, for fear he couldn't get a "mobile" replacement. That would result in an abatement to layoffs, not to mention increasing the pricing power of the immobile labor pool.

Obviously, both of these effects, if real, would be counter-recessionary and counter-deflationary. More likely, employers are not experiencing any labor problems at all, mobile or not, but it's a nice thought.

Aug 06 07:41 PM

[TCK:]

All good points !

However, I have not really understood the mass exit from paying your mortgage. As people still need to live somewhere, seems like a borrower could renegotiate the loan for close to or less than cost of renting ?

Aug 07 05:29 AM

[Tack:]

The popular belief that people have been walking away from their homes --"mailing in the keys"-- in increasing droves is a myth.

The reality is that many people, who are in financial trouble, have stopped paying their mortgages, awaiting either relief, renegotiation or foreclosure. The banks have been very reluctant to foreclose and take a realized loss on any property where they believe that the loan might be rehabilitated or the property sold, so, in essence, folks are living "rent free" in their own homes, while this plays out.

That's a better deal than paying real rent in the rental market.


On Aug 07 05:29 AM TCK wrote:

> All good points !
>
> However, I have not really understood the mass exit from paying your
> mortgage. As people still need to live somewhere, seems like a borrower
> could renegotiate the loan for close to or less than cost of renting
> ?

Aug 07 12:00 PM

[Troyhector:]

I think Homeowners who owe more than their homes' value are more likely to let the property fall into foreclosure. Negative equity is a big concern for lenders that are already seeing record home foreclosures across the country.

Read More: www.housingnewslive.co...

Aug 07 01:29 PM