Underwater Mortgages Reach Epidemic Levels

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. The reasons for that may point again to the fact the lower payments do not lower the principal amounts owed on home loans giving owners little hope that they will ever get any financial value for their property.

There have been some signs of a revival in the home sales market recently, especially in several of the hardest hit markets. Those signs may be false indicators showing only the most modest improvement in regions where home values are down 50% or more and the prices are now so low they they are creating a ripple of activity. The Zillow numbers say that the uptick won’t last.

Douglas A. McIntyre