One Quarter Of Mortgage Holders Underwater

About one quarter of all mortgage holders in the US are underwater and this number is expected to continue to climb according to reports by Zillow and Deutsche Bank. This could put downward pressure on prices as homeowners and investors look to unload their negative equity. The following post from Blown Mortgage discusses these negative numbers.

Two reports out say if you’re thinking of buying, wait. The prices are going to continue to drop. The reason they offer are the same: Continuing increases in the number of homes worth less than their current mortgages.

Zillow reports that 23% of US mortgage holders owed more than their homes were worth in the second quarter of this year. This number is challenged, but not in a good way, by Deutsche Bank which says it’s actually 26%.

Both numbers are a stark contrast to recent upbeat spins on real estate news. National Association of Realtors report that pending home sales rose for a fifth straight month in June. (Remember, the NAR’s last chief economist admitted lying about his numbers.) And the most recent Case-Schiller numbers which were widely misreported as showing a price increase in May.

While the Zillow report makes the relatively sure prediction that underwater mortgages will increase to 30% by mid-2010, DB goes all in and says it will be 48% by 2011.

This will further decrease prices as it increase the amount of housing for sale. There were 3.8 million homes for sale in June which take 9.4 months to sell at the current pace of transactions, and those numbers are from the ever-optimistic NAR.

The number of homes for sale doesn’t (and perhaps can’t) include the huge number of shadow homes out there. These are homes being kept off the market by banks, investors and individual owners waiting for prices to improve before putting them on the market. “If” prices continue to descend look to these folks to hit the market in a big way as they try to get anything back on their investments. This, of course, will further depress the price of homes. That’s a helluva catch, that Catch-22.

This post has been republished from Blown Mortgage.

Is It Okay To Not Pay The Mortgage If You Are Significantly Underwater?

With large numbers of homeowners in the US underwater on their mortgages, more individuals are choosing to walk away from their mortgage even if they can afford to pay it. It may make financial sense if mortgage principal is $500,000 when the home is valued at $400,000, but is it right to not pay back a loan under these circumstances? The following post from The Mess That Greenspan Made, explores that question.

The Economist looks at the phenomenon of U.S. homeowners who can pay their mortgage, but who choose not to. Apparently, changing cultural norms are playing as big a part on the way down as they did on the way up for the U.S. housing market.

New research based on a survey of 1,000 homeowners suggests that one in four mortgage defaults are “strategic”—by people who could meet their payments but who choose not to. The main drivers of strategic default are the scale of negative equity, and moral and social considerations. Few would opt to renege on their mortgage if the equity gap were below 10% of their home’s value, the authors find, partly because of the costs of moving. But one in six would bail out if loans were underwater by a half.
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Anger about bail-outs of banks or carmakers does not weaken the moral barrier to default. But people who live in neighbourhoods where home repossessions are frequent are more likely to welsh on loans. Homeowners who know someone who has defaulted strategically are 82% more likely to say they would do so, too. The likelihood of strategic default rises more quickly once the rate of local home foreclosures reaches a critical level. That hints at a vicious cycle of foreclosures that both depress home prices and weaken the social and economic barriers to further defaults.

Cocktail party chatter sure has changed dramatically in the last four or five years - from discussions of "$10,000 a month in appreciation" to how to "walk-away".

This blog post can also be viewed at The Mess That Greenspan Made.