Wednesday, October 08, 2008

16% of homeowners are underwater

According to The Wall Street Journal, 1 out of 6 homeowners owe more on their home than it is worth:
The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.

The result of homeowners being "under water" is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.

About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody's Economy.com.

The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."

Among people who bought within the past five years, it's worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.
The Wall Street Journal also says that for the Washington, DC area, 33.8% of people who bought in the last 5 years are underwater on their mortgages. According to the Journal, DC area houses have fallen 18.6% since their peak and need to fall another 26.6% to restore historical affordability.

13 comments:

  1. That's worse than I thought. Far worse....

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  2. That's a very good article and a good graphic showing how much further prices need to fall to restore affordability (here is a direct link to the graphic showing the 27% correction necessary):


    http://s.wsj.net/public/resources/images/P1-AN180A_HOUSI_NS_20081007213613.gif

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  3. Good article. Scary. But to the point. The real problem isn't tha RE prices are falling, it's that they're still too high. The "fundamental" that prices were based on was future appreciation. "RE is a great investment" and "Buy now or be priced out forever," are two sides of the same coin.
    JIM A.

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  4. I thought this piece was a very good read:

    "Why we should let housing prices keep falling"

    http://economix.blogs.nytimes.com/2008/10/07/why-we-should-let-housing-prices-keep-falling/

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  5. The only problem with that second article is the continuing assertion that the intent is to "make prices rise". Thats not the intent at all in that this was the whole problem in the first place. The true intent of the govt policies is to slow the rate of decline or halt declines, and allow a market to be established.

    If by some miracle the govt succeeds, house prices will not "rise" anytime soon. Instead they will stagnate until inflation works its magic and incomes can once again lift prices off the floor set by the govt. Now, that may mean some of us have to wait a while before we can afford them (i.e. until the problem is inflated away), but if the alternative is a systemic global meltdown, I would prefer the latter.

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  6. I think the article is clear when it says "try to do something to stop housing prices from falling further." Also, the title of the article is "Why we should let housing prices keep falling." While it does conclude with "policies aimed at pushing up home prices," I think this was meant to be taken similarly to a bra pushing up boobs (i.e., push up on them to keep them from falling).

    So it isn't an argument against those who want to raise prices, it's an argument against those who want to keep them artificially propped up and prevent them from falling.

    I can't see the sense in trying to prevent housing from drooping.

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  7. I understand what you are saying John, but im not sure this is what the author meant. Your humorous bra analogy works with reference to "pushing up home prices", but Im not so sure this is what he means since he also talks about "A miraculous new boom in housing prices would enrich our troubled banks". Sounds to me like he thinks the policy is meant to make prices rise - which clearly isnt the case.

    Again, "as to the sense in trying to prevent them from drooping", look at what has happened in the last 3 weeks. When I saw this thing coming 1.5 years ago, I did everything I could to get out of the way, I rented, invested in commodities, hoarded cash (in case it was deflation), everythng I could to make sure I was OK.

    The problem is, no one else prepared. My boss didnt prepare meaning I could be out of a job. Suppose I freelance. Well, my clients did not prepare, meaning they could no longer afford my services either. No matter what, their actions affect me and my wellbeing.

    Thus, if this thing works (which I am skeptical of), and it means (a) I wont lose my job and (b) people can afford me, I am all for it - even if it means it will take a bit longer than normal for me to be able to buy. Yeah it sucks to wait but its better than the alternative.

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  8. The author of this blog is misreading the Wall Street Journal article. WSJ is stating that it will take a 26.6% drop from the peak, not an additional 26.6% drop from current price levels. Zip code 22310 (Alexandria) the median household income is $95,000, and the median home price $320,000. That is close to the historic price to income ratio of 3.

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  9. Anonymous said...
    "The author of this blog is misreading the Wall Street Journal article. WSJ is stating that it will take a 26.6% drop from the peak, not an additional 26.6% drop from current price levels."

    You are very wrong about that. Your interpretation would suggest that Atlanta, Phoenix, San Francisco, Los Angeles, Las Vegas, Boston, and San Diego are currently undervalued. Click on the links to learn that they are not.

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  10. Anonymous said...
    "Zip code 22310 (Alexandria) the median household income is $95,000, and the median home price $320,000. That is close to the historic price to income ratio of 3."

    According to Zillow.com, the median home price in that zip code is $384,000, not $320,000. That gives a home price to household income ratio of 4, not 3. It may not seem like much of a difference, but it suggests that home prices in that zip code are 33% overvalued (because 4/3 = 1.33).

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  11. "James said...
    You are very wrong about that. Your interpretation would suggest that Atlanta, Phoenix, San Francisco, Los Angeles, Las Vegas, Boston, and San Diego are currently undervalued. Click on the links to learn that they are not."

    Hold on there Jamsey. The guy above said you are misreading the WSJ article - thats all. WSJ seems to be using Zillow, First American & economy.com to come up with its data. You respond by showing us (on your site), BLS, S&P and NAR data.

    Isnt it possible that the different data sets could be the issue. After all, the guy who is gay for zip 22310 says median is 320 - you say its 384. Thus, putting aside for a second whether WSJ is right or wrong, isnt it "possible" that you are misreading what the WSJ is trying
    to say?

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  12. anonymous said...
    "Isnt it possible that the different data sets could be the issue."

    No. Anonymous supplied absolutely no information to back up his claim that WSJ's "price change needed to restore historical affordability" column was from the peak. He just made an empty claim, with nothing to back it up.

    I responded by pointing out that cities which would have to be significantly undervalued based on his interpretation, are actually overvalued based on actual data.

    Based on his interpretation of the WSJ table, Los Angeles home prices would have to be 16.3% undervalued. I challenge him to provide actual data demonstrating that Los Angeles homes are undervalued.

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  13. A great research! Though they are underwater i could say that we, in this financial crisis season are near the deep water fall ahead!

    Timely article.

    Andrew Abraham
    MyInvestorsPlace - trading, value, investing, forex, stock, market, technical, analysis, systems

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