Nearly One-Third of All Homeowners Who Purchased in Past 5-yrs Underwater…Best Case

Posted on August 12th, 2008 in Daily Mortgage/Housing News - The Real Story, Mr Mortgage's Personal Opinions/Research

Zillow just reported that according to new data, that nearly one-third of all US homeowners who bought in the past 5-years are in a negative equity position meaning they owe more than their home is worth.

However, this is a best-case scenario, as it is widely thought the Zillow valuation estimates are high because they do not take in account many of the actual foreclosure related sales that made up some 42% of all sales in the state of CA last month and even a larger percentage in other ‘bubble states’. 

This massive flood of foreclosed properties coming back on the market at discounts to recent comparable sales is in part responsible for the 32% median price decline in CA in the past 14 months. My most recent monthly CA home sales report drills down on this.

One important thing to take into consideration when reading this report is that it only takes into consideration what people originally paid for their home and not if they refinanced at a higher loan amount or added a second mortgage after the initial purchase. Just the addition of a second mortgage could push this ‘one-third’ figure up considerably.  Other estimates that factor in the latter variables put the estimates closer to 55-60% that are technically ‘underwater’.

What’s most frightening is that we have learned very quickly and the hard way that negative equity is the leading cause of loan default across all borrower types.

The ratings agencies have actually jumped on this one early downgrading thousands of Prime, Alt-A and Subprime RMBS recently with many of the downgrades due to house price depreciation and the negative equity effect. Below are a couple of recent stories I have run in the past two weeks:

For those of you that did not see this report last week, we have out July CA foreclosure numbers early and they were shocking showing a 25% increase month-over-month to the highest rate ever.

Below are the Bloomberg Zillow story highlights. Best, Mr Mortgage

  • Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages.
  • Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity
  • For those who bought at the 2006 peak of the housing market, 45 percent are now underwater.
  • Almost one-quarter of U.S. homes sold in the past year were for a loss.
  • “For homeowners who need to sell, this is a gravely serious situation,” Humphries said in an interview. “It can also be harmful to communities where the number of unsold homes adds more to inventory and puts downward pressure on prices.”
  • The highest percentages of homeowners with negative equity were located in California. In four of the state’s metropolitan areas – mortgage debts exceeded the values of their properties topped 90 percent,
  • In five more California areas – the percentages were more than 80 percent.
  • Prices fell on a year-over-year basis in 140 out of 165 markets,
  • The Zillow Home Value Index is the median valuation for a given geographic area on a given day and includes the value of all single-family residences, condominiums and cooperatives, regardless of whether they sold within a given period, the company said. The index at the national and metropolitan area levels is calculated using a weighted average of the median home value for each county, Zillow said.
  • To contact the reporter on this story: Bob Ivry in New York at bivry@bloomberg.net.
  • Last Updated: August 12, 2008 00:01 EDT

14 Responses to “Nearly One-Third of All Homeowners Who Purchased in Past 5-yrs Underwater…Best Case”

  1. I live in Tucson. The RE agent next door has just told me he is doing terrific business in bank foreclosures. He just did a deal in which the buyer hit the asking price even tho she could have gotten it for less. This can only mean the banks and some buyers think the bottom has been reached without realizing some of these new loans will also be underwater in a couple of years. His brother up north who does general contracting and home inspections–this is high country, pine tree, second home area–says he is inspecting home after home in foreclosure. I have seen homes in Tucson going for too high a price and way below market price (comps) and most sitting on the market unsold. Reality has yet to fully and properly set in!

  2. The stories are getting more and more dispersed. A few areas are still rising in value and others are down 60% or more and as intimated above, the extent of foreclosure in each are seems to be the determining factor.

    There is sensible symmetry to all this. Time series data show that the weakest areas now are those that rose the most before.

  3. Glad to see you back, Mr. M!

  4. People who refinanced in the last five years at the inflated home values should be in the same pickle.

  5. Do you have any numbers if you subtracted CA out of the statistics. I would venture to say that virtually all purchases made in CA over the past 3 years are underwater. Given the very large numbers that CA produces, My guess would be that the rest of the Country’s numbers are less than 10%.

    Did you see the article regarding the highest percentage of equity cities? I was quite surprised to see some that were on the list. Might have been on Yahoo, I dont remember.

  6. Mr. M. you are in good company. Mark Zandi had the following to say in an article back in June:

    “For most, their home is their key asset. If they have no equity in their home, likely their net worth is negative too. Their entire balance sheet will be underwater.”

    He felt at the time that by June 09 he estimated that roughly 1 out of every 4 home owners (12.2 M) would have negative equity or no equity at all in their homes.

    This is pretty serious stuff here and the fact that the MSM lets it all blow by with nary a word is quite scary. This is news worthy and in fact I feel should be front page story worthy. What impact do you think this will have on people just walking away from their homes? It is quite scary to consider what the national real estate markets will look like 3 years from now. How many homeless people will exist, how many squatters for that matter? Will we have huge areas of homes simply overrun with people who are just living here and there with no accountability or responsibility for the homes they are squatting in?

    With all of these dismal numbers that are out and the bleak and dire outlook you and others propose, how long will it take to fix itself? I was originally thinking 2012-2015 but that even seems somewhat optimistic when you consider the wave of bad news that keeps pouring in. That and the length of time this is all taking due to intervention by outside parties, leaves me truly wondering if this downturn won’t last decades rather than simply years.

  7. South Florida is a madhouse. I suspect 75% of buyers are underwater and ready to default. I detail this in my blog. Florida is already in a Depression. California is headed that way. Crime will be on the increase (studies show that property crime and as a result violence increases during downturns).

    For a taste, check out 1250 S Miami Ave in Miami, Fl on zillow.com to see the level of confusion in the market. Look at purchase history (most in the 500k region in 2005), and then look at current listings for identical units. Some for 189K some for 325K, for identical units. A RE Agent commented that people hold out and end up chasing the market. The current best offers on these units is 90K.

  8. Come to Cleveland and one can see first hand for him or herself on what is going on. Basically we have worthless properties that were selling for 100K five years ago. Squatters are moving into the homes, living in them, and then burning them down. It’s a real problem here and it’s going to happen in other cities.

  9. Mr. Mortgage:

    If I own a home in California and am maxed out with sub-prime and Heloc and I stop paying the Heloc but keep paying the sub-prime, am I likely to be forced into foreclosure? Obviously the HELOCs are disaster city for the debt issuers. The question is how many more homes hit the market re foreclosures. If you are going to ruin your credit anyway, it seems the rational thing to do is walk and rent immediately.

  10. Mo…The “South Florida” comment may be close….I don’t think it is at 75% though. Although I do the majority of my loans in central Florida and in the panhandle (Where things are not really abd at all (Panhandle)), I do many loans in South Florida and where I do see the bad side….I see a lot of things that show it isn’t as bad as the mainstream media portrays it to be. Just my 2 cents!

  11. Brant, the heloc is the second note so all they can do is place a lien on the first note. NO you cannot be foreclosed on for not paying your heloc.

    However your bigger point is this: IF you live in S. CA right now and bought in the last couple of years then unless you put 20%-30% down now would be a good time to walk…

    Only a fool chases his tail until he is exahausted and broke…

  12. I purchased my home in Orlando for $340,000 Sept 1, 2006

    It is now valued at $270,000

    I have a 80% first at 5.9 that is adjusting to 9.9% Sept 1 (Payment goes from $1500 to $2300) and I have a Second at 10% ($606.00 monthly).

    I have tried to refi but there is no hope in hell. So the final option is to tell my lender (who happens to hold both the 1st and 2nd — good for me) that they either freeze the rates forever or I am walking.

    I would like to note my household income is around $200K. This is a decision made not out of requirement but more of business. The property will most likely be worth $250K or less soon. I refuse to take both a bath on the price AND get screwed by the lender.

  13. I live in the Central Coast of California. bought in 2004 with 15% down full doc 3/1 arm loan starting at 3.00%. My loan just adjusted in June to 4.25% My 1st is a great loan, it is my HELOC that is making me want to walk, i owe 77k on a HELOC with citibank. Lost my job a few years ago and it took 9 months to find a new job making 1/3 of what i used to make, needless to say i’m now filing for BK and wanted to keep my home but my attorney said if I BK now and keep the home and down the road have to let it go into foreclosure the HELOC can come after me for their loss and that I should just give up my home now and put it all in the BK. I purchased my home for 355k in 2004, i currently owe total 354k and houses in my tract are listed for 194k (one home has been listed for a year, they just keep lowering the sales price but it still hasn’t sold). I guess being prices have dropped so much where i live i would be stupid to try to hang on to my home when i can get rid of it thru the BK and start over.

  14. Wow wee ?

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