Are underwater homeowners DROWNING?
This week The Wall Street Journal reported that the relentless slide in home prices has left nearly one in six homeowners owing more on a mortgage than the home is worth, which is termed being "underwater." This raises the possibility of a rise in defaults - the very misfortune that touched off the credit crisis last year.
According to the Mortgage Bankers Association, 9.16% of mortgages on one- to four-family homes were a month or more overdue in the second quarter this year. That's compared to 6.52% a year before and was the highest level since the association began the surveys 39 years ago.
Having more homeowners underwater likely means more eventual foreclosures. It's hard, if not impossible, for borrowers in financial trouble to refinance or sell their homes to pay off the mortgage. There's a growing phenomenon called Jingle Mail - just walking away from your underwater mortgage and mailing the keys to the bank.
There is also great concern in the banking industry over what is called Buy and Bail. In an alarming number of cases, underwater homeowners are first financing a similar but much lower priced home while they can still get a mortgage, and then simply abandoning their underwater home. Just a few weeks ago, the FHA issued new quidelines to protect themselves from this phenomenon. Here's a link to a piece I posted earlier.
About 75.5 million U.S. households own the homes they live in. Roughly 12 million households, or 16%, are underwater, owing more than their homes are worth. For those that bought in the last five years, it's worse: 29% are underwater. On the flip side, 64 million have equity in their homes, including 24 million who own their homes free and clear and, and 40 million whose homes remain worth more than is owed. Are underwater homeowners DROWNING? Not necessarily. Many recent buyers might owe more than their house is currently worth, but will be just fine paying the mortgage and will be above water again in another few years.
"If I can afford my monthly mortgage payments and don't have to sell, why does it really matter if my home is underwater or not?"
The concern with being underwater may lead some to conclude that their home is not a worthwhile investment and they may decide to stop investing - that is, to stop making monthly mortgage payments. A Borrower with little or no equity is less likely to press and scrape and do everything they can to make their monthly mortgage payment. They are more likely to give up. This is a dangerous situation for lenders because if the homeowner no longer can, or is willing to, make the payments, the lender can't recover the loan by reselling the home. Mortgage companies historically were so scared of this situation that they required 20% down payments. The high number of defaults on underwater homes is what led to our current crisis in the banking industry. But, if you can hold on and continue to make your mortgage payments, as most of us can, history has shown that home values WILL rebound.
Housing markets don't turn around quickly, but they do turn around. The price slump in California in the early 1990's was a long grind. Los Angeles prices peaked in June 1990 and didn't bottom out until March 1996. They didn't get back to their 1990 peak until 2000. This is a good time to remember what your mother taught you, patience is a virtue....
Janna Rankin Scharf, GRI, CSP, CLHMS
Associate Broker
Coldwell Banker Schneidmiller Realty
(208)651-9700
NorthIdahoJanna@gmail.com
www.JannaScharf.com
Janna Rankin Scharf provides a superior level of real estate services to home buyers and sellers in Coeur d'Alene and Kootenai County, Idaho. Visit www.JannaScharf.com to search for homes in the Coeur d'Alene MLS for anywhere in spectacular North Idaho.
No matter how grand or modest your real estate dreams may be, you can turn to me in confidence. Give me a call today and let me know what I can do to be of service to you!
Janna Rankin Scharf AB, GRI, CSP, CNS, CLHMS 208.651.9700
Great post! thanks for making some of this understandable. I hadn't heard the term "underwater" before. Unfortunatelly I think consumer were under the impression that their home would always rise in value and was a safe investment. For many this is the first time they've seen housing go down.
Patience is a virtue indeed.
I just found out about the term buy-and-bail today, even though I had heard of the practice. I did a short blog entry about the practice over at my place.
I had not heard of the term "underwater" before now.
Real estate, though, is not a short-term investment. It's a place to live. If people would realize that, all would be well. My mom still llives in the first home that they bought way back in 1965.
I really think that many of the people going into foreclosure could probably pay their mortgages and hold on to their homes if they didn't think of it as a ahort-term investment and, like stocks, were willing to ride out the trough and wait for the next peak.
Hi Janna,
How've you been! Are you enjoying your new home? What do you think of blogging so far? This is new to me and I think it will help my business. Have you talked to Elissa lately? Her business is starting to move a little more. It is tough to move to a new location and start making contacts.
"Underwater homes" made the real estate section of our newspaper yesterday. They always have been behind the times, but for us to be behind even Coeur d'Alene.... LOL