Underwater Mortgages Reach Epidemic Levels

247wallst.com ^ | August 11, 2009 at 6:00 am | Douglas A. McIntyre

[Ernest_at_the_Beach]

Posit: Underwater mortgages hurt home sales and increase delinquencies and foreclosures.

People who have to pay their mortgage holder to sell their homes are less likely to be sellers. A home sold for $200,000 when it has a $250,000 mortgage is a home that the owner may not be able to afford to sell.

People living in homes with monthly mortgage payment that stretch their abilities to cover their living costs may stay in homes that they believe have a lot of equity and where a sale will eventually bring them a profit. That hope for a bonanza may encourage them to go through the agony of making large payments. People who have no hope of making money on their homes are more likely to be willing to abandon them or be kicked out.

Both of these trends make it more likely that the housing sales pace will continue to be slow and property values will not recover.

Real estate research firm Zillow says that 23% of mortgages are now underwater. The company adds that the number could be 30% a year from now. One of the major reasons for the trouble is that home values fell 12.1% year-over-year in Q2 to a Zillow Home Value Index of $186,500, resulting in a total 22.3% drop in value since the market peaked in mid-2006. Twenty-two percent of all transactions in June were foreclosures, a possible sign that people are not willing to fight until the end to save their houses.

The news is particularly bad for the federal government which has touted its program to keep people in their homes by helping them reduce their monthly payments. The program has been a failure, at least up until now.

[djf]

24% in Seattle, announced this morning.

That’s one out of four.

[ClearCase_guy]

I would think that in a "just" world, those of us who purchased homes we could afford, those of us who pay our bills on time, those of us who are not in debt and who actually having something called "savings" would be in a position to come out ahead, thereby demonstrating to others that good fiscal sense is a good character trait -- one that should be emulated by more people.

But I fear the reality is that wealth redistribution will punish the responsible, productive people, and reward the people who made bad choices.

[randog]

I would think that in a "just" world, those of us who purchased homes we could afford, those of us who pay our bills on time, those of us who are not in debt and who actually having something called "savings" would be in a position to come out ahead, thereby demonstrating to others that good fiscal sense is a good character trait -- one that should be emulated by more people.

Oh, you're talking about "lucky" people!

</sarcasm>

[johnnycap]

If you were a crack addict and you were in charge, what would you do if you and your crack addict friends ran out of money to buy crack?

It’s ok, speculate...I’m all ears...

[parsifal]

But maybe the flip side is, it was the spendthrift stupid people who fueled the consumer economy for 30 years and without them, you may not have what you have now.

There is this thing called the paradox of thrift, you google and find.

It’s like I used to tell the bill collectors who would harass me and say hurtful things to me, “Hey, without people like me, you wouldn’t have a job.”

parsy, who has been on both sides

[DuncanWaring]

Ant, welcome to the Grasshopper World.

[<1/1,000,000th%]

Ocean bottom homes?

[griswold3]

Warren Buffett said those who made good decisions will be responsible for those who made bad decisions.

‘Moral Hazzard’?

[SeaHawkFan]

In Washington, one might consider stopping mortgage payments and putting that money aside for the time ecvixctionm takes place, which takes at least a year. Lender will not negotiate as long as you are making payments.

The money saved over the course of a year would go a long way towards a down payment when the market hits bottom in two years. Lenders can’t go after deficiencies in WA.

[Psalm 73]

"what would you do if you and your crack addict friends ran out of money to buy crack?"

Um, prostitute ourselves? No, wait, I mean, um, steal - yea that's it, I'd steal.
And maybe a little prositution on the side

[M203M4]

Housing prices are still too high. The long-term, historical tracking of housing prices to income was interrupted by social engineering and poor monetary policy (for example, the effective federal funds rate dropped from 6.25% in 2001 to 1.8% in 2002 - pouring gas on the F-I-R-E).

Prices need to continue to fall, perhaps by another 30% in some areas, until the historical ratio of incomes to home values (about 1:3) is reached. The ratio will indeed trend down (higher home price per unit income) slowly with time due to density growth and the economic scarcity of land - but we are talking a e-folding timescale of perhaps centuries at current growth rates.

[RSmithOpt]

Good call because wages have done nothing to keep pace with the cost of a single family home in many many markets.

The flippers have flopped as many drank the kool aide and swallowed the greed pills.

The results of the globally conspired credit expansion has come home to roost allowing a select few to skim the cream through the the bogus Greenspan unregulated CDS swap 'ccok the bank books' economy and handed the tax bill to Joe and Josephine Plumber, their kids and grandchildren.

[RSmithOpt]

Good call because wages have done nothing to keep pace with the cost of a single family home in many many markets.

The flippers have flopped as many drank the kool aide and swallowed the greed pills.

The results of the globally conspired credit expansion has come home to roost allowing a select few to skim the cream through the the bogus Greenspan unregulated CDS swap 'ccok the bank books' economy and handed the tax bill to Joe and Josephine Plumber, their kids and grandchildren.

[RSmithOpt]

Good call because wages have done nothing to keep pace with the cost of a single family home in many many markets.

The flippers have flopped as many drank the kool aide and swallowed the greed pills.

The results of the globally conspired credit expansion has come home to roost allowing a select few to skim the cream through the the bogus Greenspan unregulated CDS swap 'ccok the bank books' economy and handed the tax bill to Joe and Josephine Plumber, their kids and grandchildren.

[RSmithOpt]

triple post problems with browser and/or FR dragging...sorry

[M203M4]

Hmmm!!!!

[bobjam]

All of this is wrapped up in what I believe the real scandal of the housing situation is: appraisals. For the last five to eight years property appraisals rose quickly. In many places, they skyrocketed to unbelievable heights. Appraisals were driven up by
1) Cash hungry local government: the higher the appraised value, the higher the property tax revenue
2) Opportunistic realtors: the higher the sale price, the higher the commission
3) Lenders: the bigger the loan, the bigger the payment and the bigger the interest revenue.

The easy availability of money through adjustable rate and interest only mortgages created a demand for housing. That demand drove up sale prices, which in turn drove up appraisals (appraisers base their valuations largely on sales prices of similar nearby homes). Now that sales have virtually stopped, appraisals are plummeting and people who bought $250,000 homes have found themselves with $175,000 homes.

[Eleven Bravo 6 319thID]

Being underwater in and of itself should not be a life threatening problem. If these people made reasonable financial decisions, they should be able to pay out the mortgage and maintain their living standards, regardless of the value of the house. If they need to sell, they need to accept their losses and then go to something more modest that they can then afford.

[Ernest_at_the_Beach]

Great chart....