Thursday, June 9, 2011

How Underwater Are American Households?

In early June, CoreLogic released its analysis of negative equity data for the United States housing market.  In this interesting quarterly report, CoreLogic analyzes which residential real estate markets in the United States have the highest and lowest percentage of households with negative equity and quantifies the negative equity that borrowers in each state average.  The report also examines which states have what CoreLogic terms "near negative equity"; these are the households that have less than 5 percent equity in their homes.  For those of you who aren't aware, negative equity (also referred to as "underwater" are borrowers/mortgage holders that owe more on their mortgages than their homes are worth.  As CoreLogic notes, negative equity can result from either a decline in the value of the home, an increase in the total amount of mortgage debt or some combination of the two factors.  In many cases, the extraction of equity from homes through the use of home equity loans is to blame for the problem as we'll see later.

As background information, the CoreLogic study includes data from 48 million properties across the United States; this accounts for over 85 percent of the country's mortgages.  Data was only used for properties that were valued between $30,000 and $30 million which should cover most of us!

When compared to the first quarter of 2011, the negative equity situation was slightly improved.  In the second quarter, 10.9 million residential properties with a mortgage were in negative equity compared to 11.1 million in the first quarter of 2011.  This translates to 22.7 percent of all residential properties in Q2 compared to 23.1 percent in Q1.  In addition, 2.4 million additional borrowers had near negative equity (as defined above).  When the negative equity and near negative equity borrowers are summed, 27.7 percent of all residential properties with a mortgage are in deep trouble.

Now let's look at the state-by-state data starting with the three states that have the highest percentage of underwater properties, the percentage of those properties and the trend from the previous quarter.

1.) Nevada: 63 percent underwater, down 2.7 percentage points
2.) Arizona: 50 percent underwater, down 1.3 percentage points
3.) Florida: 46 percent underwater, down 1.3 percentage points

Now let's look at the three cities with the highest percentage of underwater properties:

1.) Las Vegas: 66 percent underwater
2.) Stockton: 56 percent underwater
3.) Phoenix: 55 percent underwater

Nationwide, the average negative equity mortgage holder was underwater by $65,000.  According to the study, this amount varied widely by state.  Here are averages for the three top states:

1.) New York: underwater by $129,000
2.) Massachusetts: underwater by $120,000
3.) Connecticut: underwater by $111,000

The three states with the lowest average negative equity are as follows:

1.) Ohio: underwater by $31,000
2.) Indiana: underwater by $34,000
3.) Minnesota: underwater by $38,000

The part of the study that I found very interesting was the data on mortgage holders that had borrowed against the equity in their homes, a very common occurrence when home prices were rising in the early to mid 2000's.  Nationwide, borrowers with positive equity in their homes had an average of only 1.2 loans per property.  On the other hand, borrowers with negative equity had an average of 1.6 loans per property and when negative equity rises to a loan-to-value ratio of 150 percent or greater, borrowers had over 1.7 loans per property.  Only 18 percent of borrowers with no home equity loans were underwater compared to 38 percent of borrowers with home equity loans.

Finally, let;s take a quick look at the default rates for various degrees of negative equity.  Where borrowers have a loan-to-value ratio of 150 percent or higher, they have a default rate of 12 percent.  This drops to approximately 7 percent for borrowers with loan-to-value ratios of between 125% and 149% and continues to drop to approximately 2 percent for borrowers with loan-to-value ratios of between 100 and 104 percent.

While the negative equity situation for borrowers has improved very slightly over the past quarter, data shows that it has improved very little over the past year.  Since the first quarter of 2010, borrowers with negative 25 percent or greater equity in their homes is firmly stuck at 10 percent of all homeowners.  Despite Mr. Bernanke's protestations to the contrary, unless the economy really takes off in the second half of 2011 and creates a massive number of high paying jobs, this situation is unlikely to improve in the foreseeable future.  The impact of negative equity households on America's real estate market will continue to keep prices from rising and, if the economy softens as it appears to be doing, it is likely to lead to even greater numbers of foreclosures entering the market acting as a brake on any housing market recovery.


  1. "to rein in" is spelt thus, and not as "to reign in".

  2. I think to solve the porblem , US should go for another war either in IRAN or SYRIA or North Korea.

  3. Ha ha - it seems the war boom ran out years ago

  4. "Negative equity was slightly improved in the second quarter of 2011." Why? People are probably spending less of their disposable incomes, thus improving the equity situation of their homes. But it also means that many businesses suffer.

  5. The reason consumer spending is up, is due to a large amount of people that are not and have not paid there mortgage in years, and are yet to actually get kicked out of there home. Here in Norhtern Va jobs are everywhere but everyone is walking from there homes. This will not het better til 2015.

  6. Seriously, I think those with negative equity should walk (unless there is something special about the house, like they intend to die there). Who in their right mind would carry that debt. Certainly no business would, just look at how the mortgage association walked from their DC headquarters. That right there should set the trend for the country. Until all this 'fake value' is wiped off the books, the economy will continue to go sideways at best. They need to enable bankruptcy cram downs now and make that permanent.

  7. What this doesn't take into consideration is that EVERY homeowner in need of selling also must chaulk up an additional 8% to 12% of the sells price in order to effect a sale as typically sellers are demanded to pay 3 to 5% buyers closing costs and Realtors continue to charge outrageous 5 to 7% sells fees.

    If this were added to the equations above then the REAL number of underwater homeowners would be about 7% higher (34% underwater or 1 in 3 homeowners!).

  8. So refreshing to read realistic, true, intelligent observations and comment. Thanks guys, you give me hope that there is actually a legion of the un-brainwashed, non-propagandized out there!

  9. Housing starts are a leading indicator, and as many have said, there will not be an increase of housing starts until all the inventory is reduced, which will not happen until we see an equilibrium in housing prices/demand. I could not see how anyone could see this happen faster than 3 years and I think it will be more like 5-7 years because we have not seen the worse of the people walking away from their mortgages.

    Funny thing, a P.H.D. economic professor recently told me he believes that congress will pass a law making it harder to walk away from their mortgages. Yeah, if they did that, there would be a mad rush to walk away before the law was enacted (like the change in bk laws a decade ago) Yeah, I'm sure the spike would be fun to watch.

  10. Interesting but insufficient. I would be curious to know how much of the underwater percents are a result of refinancing of the original loan, compared to ones without that are the result of the current market values.

  11. So for those us paying two mortgages because we can't sell in this environment, is it wise to bite the bullet and bring $200K to the table and sell a pristine home @ foreclosure prices just to get out of one mortgage?

  12. Housing is going to be in this mess for a long time to come. Currently the foreclosure pipeline spigot is virtually turned off due to the robo-signing scandal, but once robo-signing is cleared foreclosures in non court awarded foreclosure states are going to skyrocket very quickly. However, foreclosure in court awarded foreclosure states will continue to be stalled to the serverely backlogged court dockets.

    I would give it 3 to 5 more years before I may start to see price appreciation overall. In that interim period, home prices will continue to drop....

  13. I saw this coming back in the mid 90s as I watched my younger friends move in to new $300,000 plus homes putting very little money down. Also paying huge property taxes and leasing BMWs and using credit to go on vacations. Now they should down size and become renters. In 1996 I got in to an nice brick ranch home on one acre originally built in 1958 for 85 grand. I have been living there and fixing it up as I can afford to. Now it is worth 140 grand but I don't plan on selling. All of those empty cheap built/expensive homes need to be bulldozed down and let the cows come home.

  14. As long as we are only creating $8 and $10 an hour jobs home prices will have to continue to decline to be affordable to these people.

  15. Very interesting analysis. Income levels have to rise to match the current home prices. The dissociation of income to home value, is a key in bringing things back up

  16. equity loans during the boom... wheeew! i used to bike around neighborhoods in FL and look for landscape ideas. every home had 2,3 even 4 new vehicles in driveway. not in garage as they were full of wal-china stuff. i even started just to look at garages and EVERYONE FULL. hence a storage facility every where. i am hahahaha at my fellow american glutton