Thursday, August 06, 2009

48% of homeowners with mortgages to be underwater by 2011

That's the forecast of Deutsche Bank, via The New York Times:
The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties' value, up from 29 percent, it said. ...

Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.
Note: I believe The New York Times has made a significant and sloppy error. It says 48% of homeowners will be underwater, when it should be 48% of homeowners with mortgages. Not all homeowners have mortgages. A homeowner without a mortgage cannot go underwater. If memory serves me correctly, roughly one third of homeowners own their home free and clear. That makes it mathematically unlikely that half of all homeowners could end up underwater. I checked Bloomberg, and they say 48% of homeowners with a mortgage, not 48% of all homeowners.

19 comments:

  1. well I think it was understood they were talking about people with mortgages.

    I say we get rid of the word "home owner" altogether and just call them "mortgage owers"

    It would fix the issue you have as well. 49% of all mortgage owers will be underwater in 2011. See?

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  2. or call them "mortgage debt owners"

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  3. yeah well, both the mortgage owners and the mortgage debt owners will be underwater!

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  4. Good catch James. I agree with your analysis.

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  5. So what is going on with the loan modification?If someone can pay rent, than that same person can pay a mortgage payment if structured correctly. The government is providing $8,000 for first time buyers, so why can’t the government pay part of the payment and have the borrower repay the government in the future??
    Instead of a rental payment, let the homeowner make the payment toward the mortgage and the government can cover the difference in a mortgage assistance program which will be repaid over time.
    Here is an example of how it could work.

    accuriz.com/RealEstate_Reports.aspx

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  6. Here come the zombie banks. If there are currently a million vacant homes in the US, that number could double or triple by then.I guess the banks will eventually own everything in this country.Aided of course by more than generous taxpayer subsidies.

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  7. "If someone can pay rent, than that same person can pay a mortgage payment if structured correctly."

    Last time I checked a mortgage payment is 5 to 7 times more than the rent is in DC. The only way to structure the mortgage payment to be equal to rent is to make the loan repayable over 275 years, instead of the standard 30.

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  8. "repayable over 275 years"

    hilarious

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  9. "The government is providing $8,000 for first time buyers, so why can’t the government pay part of the payment and have the borrower repay the government in the future??"

    The aim of the $8,000 first-time homebuyer tax credit is to incentivize the purchasing behavior of those that would otherwise be buying homes if it weren't for a fear of further declining values in homes. The belief is that this will stabilize the market by reducing the fear factor that goes beyond real value and also to quickly consume the glut of excess inventory that currently exists in many local markets.

    What you're asking is for the government to loan you money to make payment on an existing loan. That's like using your credit card to pay your mortgage. It's not a sustainable situation. There is no benefit to enabling this unsustainable position.

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  10. "Last time I checked a mortgage payment is 5 to 7 times more than the rent is in DC."

    If this is truly the case, you have to understand that you are paying an enormous premium to own a home in DC. If (when) home value return to their actual value you'll have to either continue paying that premium to remain in your home or suffer the some other unfortunate consequence of purchasing an overvalued home.

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  11. Tuskenrayder,

    Yeah low end homes went from $200K to $800K in about 6 years. They are currently around $600K for the low end. You can rent one of these low end homes out for about $1400. Find me a mortgage of $1400 on a $600K home and I will take it!

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  12. buyinginpetworthAugust 07, 2009 12:18 PM

    "Last time I checked a mortgage payment is 5 to 7 times more than the rent is in DC."

    Sorry that is not true for all of DC. We are buying a house in DC proper. Our current rent is $1800 a month, which only includes the upper portion of the rowhouse. The basement is rented for $800 a month. The landlord offered it to us for $500 a month.

    We are purchasing a house and our payment including taxes and insurance will be about $2100 a month. This is a four bedroom house and we couldn't rent it for less than $2500 a month.

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  13. buyinginpetworth,

    Are you comparing apples to oranges though? The rowhouse you are renting you could buy for $250K?

    A mortgage payment of $1800 would be a $250K loan. Oh the basement too? Yeah but that mortgage payment didnt factor in taxes, hoa, insurance, maintanance either.

    You would be pretty hard pressed to find a rowhouse that isnt in cracktown for less than $250K in DC.

    My rent in Rockville, one block from Potomac city limits is $1500. Its a townhouse, which in my neighborhood has 5 for sale currently, all going for $600K.

    Could I find a place in Gaithersburg and have a mortgage payment of $1500? Sure! However, Im not comparing apples to oranges here.

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  14. buyinginpetworthAugust 07, 2009 2:41 PM

    Well, considering that the rowhouse we are buying is a block away from where we currently rent I don't think it is an apples to oranges comparison. In fact, the house we are buying is in much better condition and larger than the house we are renting.

    My mortgage payment has the taxes and insurance factored in but obviously not maintenance. There is no HOA. So, for us to have the entire house we would be paying $2300 a month in rent. The landlord currently gets rent for the whole house for $2500/month.

    Currently, the least expensive 4 bedroom house on Craigslist (to rent) in the neighborhood is $1850. However, it is significantly farther from the metro (we are about .7 miles). I have no idea why it is so inexpensive as the next least expensive house is $2300.

    Trust me I researched this extensively there is no way we could rent this house for less than $2500 a month.

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  15. So where are these row houses in DC going for less than $200K? I want in!

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  16. I always find it amusing when folks bring their extensive knowledge of the far suburban housing market to bear on DC.

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  17. The NYT copy is correctly worded. They wrote, "The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011..."

    The operative phrase here is "who owe" which modifies "homeowners." If one does not have a mortgage, it is assumed that they do not "owe."

    Beyond phraseology, this report is frightening, and if true portends a far greater drop in housing values by 2011-2012 than anyone seems to be forecasting. You can't have half of all mortgages underwater in a tight credit market with stable housing prices.

    Home values must continue to drop until three fundamentals are back in place: (1) positive job creation relative to population growth, (2) nominal access to credit, (3) stable mortgages.

    Does anyone have historical data (1960-2000) on the percentages of underwater home mortgages?

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  18. buyinginpetworth,

    Petworth is a good buy now. I too just bought in Brookland. I got a rowhouse in really good shape for $239. My total payment, PITI, is $1620. I researched before I bought and the rent on this home would be about $2000.

    I don't know of any place in DC where a mortgage payment would be 5-7 times the rent. Even at the height of the bubble, I paid $1200 a month to rent a rowhouse that had been just purchased for $420k. The mortgage on the same house would have been double my rent. 5-7 times is a gross exaggeration.

    Congrats on your purchase. For those in the know, there are good values available now.

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  19. "Last time I checked a mortgage payment is 5 to 7 times more than the rent is in DC."

    Where did you get this number from? Also does it take in to consideration that the average rental unit is most likely going to be much smaller then the average home for sale? Think about it, most single famely homes in DC are not rental units. Although people periodically rent houses and town houses most of them are not rental units vs appartments which are.

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