Today's Negative-Equity Update

Two fascinating charts from the folks at Zillow today. Both highlight current trends in negative equity -- homeowners who owe more on their home than it is worth -- albeit in different ways.

First, here is a look at number of homes with negative equity split out by year purchased and by region. Those foolsbuyers who picked up homes in 2006 stand out in a fairly striking way.

Next up, here is percentage of all U.S. homes by region currently sporting negative equity:

Despite the recency of the bubble, and despite the giant stock of U.S. houses, you get a sense for the immensity of the issue. To have 13.9% percent of homes nationally, and 18.2% of homes in the West, owing more than their worth is quite a feat in a five-year bubble. Congrats everyone.

Comments

[seahawk:]

I would take zillow's take as a grain of salt. They are known to have very low estimates on homes at least here in the Tampa area. Their figures don't even compare to the tax records. Don't know where they are getting their figures from? At least in this area they are not very reliable.

2008 Aug 18 11:03 PM

[markg:]

We just had an appraisal done on a house in Camarillo,CA. The zillow estimate was within $5K of the appraisal done by an appraiser, who did not know if he was hired by a buyer or seller.

2008 Aug 18 11:53 PM

[rm:]

Most homeowners aren't happy with being a little "underwater," but when there's a significant gap, the house becomes more of a "bad investment" and less of a home, and the "American Dream" becomes a disposable item.

At some point, investors are going to have to suck it up, give up the "moral hazard" argument, and figure out how they're going to administer principal writedowns on a wide scale.

Or, they can face even greater losses.

2008 Aug 19 08:36 AM

[Griz:]

I find zillow to be consistently 10%+ too high in their estimates for the So. Cal (SD, Orange, LA) areas. I can often search and find many homes on the market with current listing prices well below the Zillow price. Zillow is a lagging indicator, with sale transactions forming the basis of their estimate. As we all know, the price reported in a sale transaction could have been negotiated many months ago, thus in a falling market their estimates come out consistently too high.

With approximately 46% (and falling) remaining US homeowner equity, as measured by the Federal Funds Flow report, the next 20% to 40% in price declines could wipe-out just about all remaining US homeowner equity. As the price level drops lower, more and more transaction volume is also uncovered. As we eat into the 2004, 2003 and 2002 transaction layers, an accelerating percentage of homeowners will find their way in negative equity positions. No way, that'll never happen? Just like "real estate never goes down" (remember that one?).

2008 Aug 19 10:15 AM

[Steve0:]

It’s cheaper to own a house in many places than to rent one. Come up with 10% down buy one of the distressed home and your way ahead of the game. Your doom and gloom is off base. By your number 13% of households are underwater but what about the 87% of the nation you neglect to discuss. Lesson learned, payoff your house as fast as you can and never pull equity out unless your upgrading and there is a ROI on the improvement.

Also, if your upside down by 80K what does it matter if your not trying to sell you house. Sit on it and ride this storm out. 200K then you have a problem.

2008 Aug 19 11:05 AM

[ReEconomist:]

How can anyone say negative equity doesn't matter? It matters a lot. Consumer spending is 65% of our economy. First, the home ATM machine is now closed. Second, when consumers don't feel confident about their future, they pull back on spending and reign in their spending. Discretionary spending gets slashed. This phenoeman feeds on itself and the result of slower economic growth becomes self-actualizing.

Regarding falling home values, it's the unknown in consumers that causes the most angst. Not knowing how far prices can fall is a bigger part of the confidence for many than the amount of the actual correction.

For a better understanding on the top level and bottom level of home values, check out Ceiling and Floor Fundamentals at UsHousingMeltdown.org The Floor Fundamental identifies the lowest prices can go based on their ability to produce rental income.

The shorter the spread from ceiling to floor the less risk of price declines. The greater the spread from ceiling to the floor the more risk to prices.

2008 Aug 19 01:57 PM

[wpdragon:]

don't know about that stev0... i am currently renting a 4BR 2BA condo townhouse on a ski trail on one of the biggest ski areas in VT... furnished to the nines and cable/local phone included. $800/ month.

On Nov 1 I do a seasonal move to a 2BR 2BA furnished condo including cable right on a beach in FL... $1000/mo.

Yes, both of these properties are on, or were on, the market.

I couldn't rent unfurnished apartments for that, and I don't have to worry about the maintenance costs and aggravations, or the taxes and insurance or condo fees, or the drip drip drip of my equity going down the drain.

Its a simple, stress free way to live... pack the car with everything I own, drive for two days and unpack the car and I'm hiking a mountain or the beach the next day, with none of the pains, costs or losses of home ownership... and its not something I see changing over the next year or two anyway, which is as far out as I care to look.

2008 Aug 19 01:58 PM

[dickjanine:]

It's bad enough to lose equity, but to have some clever reporter call you a fool for buying when I did and then get a smart comment "congrats"

2008 Aug 19 03:06 PM

[Steven Hansen:]

the longer the period the homes have negative equity, the bigger the problem will become. i thought the average number of years a person lives in a house was 7 (i could not confirm this via google). if you need to move to get a better job, or need a bigger or smaller house - you will just walk away.

2008 Aug 20 02:55 AM

[Colorado Ho...:]

Zillow says my home is worth in the 170s. Chase recently froze the HELOC claiming my home is only worth in the 150s. Meanwhile, actual sales in my neighborhood are running 130s-140, max.

2008 Aug 20 08:02 AM

[Steveoh:]

Equity is a myth, sold to homeowners by those that would indebt them. The only way to realize equity as profit, is to part with the asset in a sale at a price point above the purchase price (less cost of transaction.) If equity is anything real, it is merely potential profit. Anything else is just more indebtedness or a scheme to part a greater fool and his money.

By the way, another concept that everyone probably knows but that many are currently ignoring is that: something is only worth what someone else will pay for it; not what you wish it to be worth. If nobody wants what you are trying to sell, then it's worth exactly nothing in that market.

It would seem that our banking system is currently relearning this concept and trying like hell to keep everyone distracted from it.

2008 Aug 20 12:35 PM

[PopGoesBend:]

User 236368,

You say that Zestimates for Tampa are very low. They may be compared to tax records, but not to actual sales. Looking at recent sales in Tampa, Zillow is close on a lot of them and if they are grossly off it is because they are too high.

www.zillow.com/homes/r.../

2008 Aug 20 12:50 PM

[Mr Mortgage:]

This information is by and large inaccurate and much worse in reality.

This is because Zillow uses original purchase price to compute the negative equity despite larger percentages having refi'd after the fact or added a second mortgage. The problem is much larger than depicted here.

2008 Aug 20 01:53 PM

[Welsh_Dragon:]

It is clear to me that all parts of the country are not affected equally. Dallas area real estate has trailed inflation for decades. Homes were still largely under $100 per square foot even at the height of the bubble.

Most importantly average incomes have and continue to be in line with traditional lending standards. I content that a smart buyer buying within their means with a stable job in Texas who (say) got into a new home for $75-$100 per square foot was smart.

Most could not get a loan any more. Underr 6% fixed is not coming back. Cost to build is going up. Watch what happens 10 years from now. It's all about the local market and extent of the 2000-2006 price run up (if any) IMO.

2008 Aug 20 03:11 PM

[cageordie:]

What we are seeing is a return to the harsh economic reality that in the long term people can only afford to pay about three times their income for a home. That's all there is to it. So for my area, SF Bay, where home prices are up to twelve times current household incomes, this means a massive and ongoing decline. People will come up with all sorts of exotic theories for why that can't be so, but in the end the prices can only be paid by a buyer who can afford them.

I'd say Zillow's prices are accurate, or at least close enough. More than good enough for tracking trends.

2008 Aug 20 05:13 PM

[Brett Shaw:]

Brett Shaw from Cyberhomes:

Whether or not the zestimates are off (I'm assuming here that this is where the data comes from), the chart does accurately show the trend. Sure there are gonna be areas of the nation that have remained stable, but purchases at the peak of the bubble did create many negative equity situations.

What people don't seem to understand is that real estate is cyclical and home prices will rebound. Perhaps not to the same highs, but still. I agree with Steve0 on the fact that it really doesn't matter if you're planning on staying in the house for a few years. When you're ready to sell your house, that's when the issue will arise.

2008 Aug 22 03:39 PM