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34% of All Homeowners Are Underwater
November 24, 2009 by Neil · 4 Comments
Today’s WSJ reports that 23% of homeowners owe more than the current value of their homes. While this is front-page news, it is not surprising to those who have been tracking this trend. Back in August, we expected that half of all U.S. homeowners would be underwater by 2011.
In the middle of the article, WSJ points out that the arithmetic now accounts for payments made by homeowners that reduce principal, and it no longer assumes that home-equity lines of credit have been completely drawn down. If we assume that home equity lines have been completely drawn down — an eminently reasonable assumption — the percentage of homeowners jumps to 33.8%.
Some good news: According to the Census Bureau, most U.S. homeowners still have some equity, and nearly 24 million owner-occupied homes don’t have any mortgage. These folks, however, have not dodged the bullet. Now the bad news for the 66.2%: According to one study, every home foreclosure drives down neighboring home prices within 1/8 mile by 0.75%. Properties within zero to 300 feet on average experience a 1.3 percent decline in value, while properties within a 1/8 mile radius have a 0.6 percent decline. If these houses get foreclosed en masse, the housing market will further (!) implode, and multifamily prices will decline even more.
The WSJ blames “jittery home builders and bad weather” for a 10.6% drop in new home starts in October. Also to blame, but not mentioned: a lack of available credit for businesses, and 20 months of unsold housing inventory. If every homeowner right now who is not in default stays current on his mortgage, it will still take 20 months for the economy to digest current excess housing inventory. This includes both homes on the market, as well as estimated shadow housing inventory.
Besides joblessness and underemployment compelling defaults, a rising number of owners are strategically defaulting on their mortgages. Borrowers with negative equity are more likely to default if they live in a state where the bank can’t pursue their assets in court, according to a study by the Federal Reserve Bank of Richmond. Perhaps this conclusion on lack of personal responsibility can be found in Chapter 11 of their study.
Update 11/25/09:
Quote of the Day:
“Negative equity is the No. 1 reason for default and banks are ill-equipped to handle it.” – Frank Pallotta, an executive vice president and managing partner at Loan Value Group LLC, a risk management firm in Rumson, NJ.
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4 Responses to “34% of All Homeowners Are Underwater”Trackbacks
Check out what others are saying about this post...[...] Interest modifications may not be enough to make a difference for a homeowner. 2. Negative equity may be too much of a disincentive to pour any additional money into a home. 3. Banks make more fees [...]
[...] 20 months of shadow housing inventory still lurk in the shadows, the residential housing market cannot have hit bottom. Once these units come online, vacancy rates [...]
[...] 20 months of shadow housing inventory still lurk in the shadows, the residential housing market cannot have hit bottom. Once these units come online, vacancy rates [...]
[...] 20 months of shadow housing inventory still lurk in the shadows, the residential housing market cannot have hit bottom. Once these units come online, vacancy rates [...]