One Quarter of Home Sales are Below Original Purchase Price

CNNMoney reports:

More homeowners than ever are selling at a loss, propelling the real estate market deeper into crisis.

In the 12 months that ended June 30, nearly 25% of all homes sold nationwide fetched less than sellers originally paid, according to real estate Web site Zillow.com.

While the nation's double-digit decline in home prices has been well documented, the new report underscores the economic force of those price declines. Homeowners are walking away with much less in their pocket when they sell. And that affects more than the real estate market.

"It's stunning what's happening out there," said Stan Humphries, Zillow's vice president of data and analytics, who looked at statistics that date back to 1996. "The numbers are the worst we've seen and it's not just the magnitude of the problem but the scope - so many markets are affected." ...

Nationwide, nearly a third of all homeowners who bought since 2003 owe more on their homes than the homes are worth. And those that, like Bell, put little or none of their own money into the home purchases, are more likely to try to sell short or simply abandon their homes.

"They hand over their keys and walk away from the homes," says Danielle Babb, a real estate investor, instructor at the University of California Irvine and author of "Finding Foreclosures."

That adds to foreclosure rates. Zillow reported that nearly 15% of U.S. existing home sales during the last 12 months involved foreclosed homes.

That trend will almost surely continue. ...

A plethora of sellers taking losses can have a chilling effect on people's lives, says Dean Baker, co-director of the Center for Economic and Policy Research in Washington.

People don't want to sell at a loss, so they put off their plans, whether it's a move for a better job opportunity elsewhere or trading up to a larger home.

"That will delay the [market correction]," said Baker. "It takes time for people to recognize that [these losses] are real."

A quick turnaround is not likely. More than $200 billion in adjustable rate mortgages are scheduled to reset during the second half of 2008, according to the National Association of Realtors, and loans of all types defaulting at high rates. There is also about 11 months of inventory at the current rate of sales.

"With $3.9 million unsold homes on the market, prices will have to come down even more before the market stabilizes," said Zillow's Humphries.

I am surprised that this is coming from Zillow, because I have been having trouble finding homes on Zillow.com where the Zestimate graph shows a significant reversal of the housing bubble. I mostly look in the Washington, DC suburbs and I usually see a huge increase in prices, followed by only a small decline. (Prince William County, VA is a notable exception.) Most homeowners should still be sitting on huge gains, not losses.

Also, if someone had bought a house in 2000, traded it for a new house in 2004, and is trying to sell that today, they would be counted as one of these poor folks who are upside-down on their homes. However, they would have made so much money during the 2000-2004 period that there would be little reason to feel sorry for them. They would be no worse off financially than if they had simply bought a house in 2000 and then held it until today. Except, in this latter case, they wouldn't be counted as upside-down.