WSJ: 1 in 6 homeowners upside down, and growing
posted at 3:00 pm on October 8, 2008 by Ed Morrissey
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The Wall Street Journal paints a grim picture of the housing market today in its analysis of debt-to-equity ratios in the residential market. The rate of homeowners who owe more than their equity has increased to 16% after a 30% decline in housing values. That’s almost three times the rate in 2007 and four times the rate in 2006, and it’s likely to keep going higher:
About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody’s Economy.com.
The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm’s chief economist, Mark Zandi, who adds that “it is very possible that there will ultimately be more homeowners under water in this period than any time in our history.”
Among people who bought within the past five years, it’s worse: 29% are under water on their mortgages, according to an estimate by real-estate Web site Zillow.com.
The majority of homeowners still have equity, and even among those who don’t, many continue to make their mortgage payments on time. The financial-bailout legislation could at least “keep things from getting much worse” by helping banks avoid the need to tighten credit further, says Celia Chen, director of housing economics at Economy.com. Still, she expects housing credit to remain tight and home prices to decline in much of the country for another year or so.
The problem is more regional than national, at least at the extremes. Texas and North Carolina are experiencing a slight increase in home values, at least at the moment. The hardest-hit areas are Florida, Los Angeles, Las Vegas, and San Diego. Percentages of under-water homeowners who bought in the last 5 years go over 50% in San Diego and Las Vegas, and above 40% in Miami and Phoenix.
What will this mean? The WSJ warns that a consumer-spending freeze is coming that will slam the economy. Right now, lenders aren’t interested in selling car loans or credit on other big-ticket items, and people aren’t likely to buy them anyway. The decline in sales will result in plenty of lost jobs, which will in turn hit the residential housing market all over again. Ad sales will drop as consumer spending declines, meaning that many who rely on that for revenue will find themselves gasping for resources. And of course, as foreclosures mount, they will deepen the decline on home values.
On a brighter note, the decline has brought home prices much closer to their historical relationship to income. As that point approaches, housing prices should hit bottom and start rebounding, assuming that a massive load of foreclosures doesn’t create its own revaluation.
In looking at the WSJ’s map, in fact, the problem appears mostly concentrated in Florida and California, with hot spots in Green Bay, up the West Coast, and to a less intense extent on the northern East Coast. What does that mean politically? Does it mean that the fallout from the housing bubble can be quarantined to these regions? Interesting questions, with no real answers at the moment.
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…it ain’t bad all over….
…when it came time for our family to finally burn out suitcases (in out case, as a military family, it was dufflebags), our collective aversion to living in a city led us to look in an 80-mile circle around the last place we were stationed. We wanted to be out of town.
Now, that town being San Antonio, TX, it wasn’t an aversion to the town. San Antonio is a growing place, and a very homey place. I recommend it. Toyota built a plant here, there’s lots of rail and road infrastructure, there’s some manufacturing, it’s on the fast lane to Mexico, etc.
Still, we found a dandy little place in a dusty but wonderful little wide-spot-in-the-road town, and you won’t get us to,
1) Move. GREAT school, great neighbors, good taxes, etc.
2) Refinance. The place cost $75K, and we got it at under 5%.
With recent tax assessments, we’ve been here maybe 19 months and we’re already building equity, even given that we’re still paying mostly into the interest.
So, it ain’t bad everywhere.
The problem comes when you have aircraft carrier tastes but a motorboat ass, have to live within 3 microseconds of the mall, need a fresh Starbucks latte to open your eyes in the morning, and can’t survive if any effort is required to get high-speed cable, high-speed internet, and municipal jewelry like buried power and phone lines and sidewalks.
If someone offers you an effortless mortgage for a house you can only afford if you and your matrimonial roommate both work, one of you two jobs, and also sell blood plasma every even-numbered Tuesday, you’re a sap if you take it. Maxims mentioning free lunches come to mind.
Over-extending yourself and then whining about it is the hallmark of our childish present age. Living within your means is required of adults…of whom we seem to be in desparately short supply at present…in boardrooms, in Congress and in the White House….
…then again, bitching and then panicking relieves the boredom….
Puritan1648 on October 8, 2008 at 4:21 PM
LOL hear ya… Lets see… my 2 kids, Girlfriend and her two kids, dog… no boat anymore…
But it does let me joke around about “driving the short bus…. for the SPECIAL passengers”.
Romeo13 on October 8, 2008 at 4:23 PM
oh yes. I still live in the house I bought in 1983 for $115. Instead of buying a bigger house when it was time to move in my mother-in-law a few years ago. It’s now about 3000 sqft with a finished basement, four bedrooms, 2.5 baths on an 1/8 of an acre in Arlington, Virginia. It made it up to 750K but think its around 600K now. I have about 300K in mortgages on it. I never took out more then I needed for a refinance for construction. The value can fall another 100K and I still would be doing just fine.
jerryofva on October 8, 2008 at 4:24 PM
Absolutely! I mentioned this in a conversation with friends a few months ago. With an annual population increase of .88%, we’re barely above break even.
dominigan on October 8, 2008 at 4:25 PM
Here in Indiana the state just moved to a market value based real estate tax model. I am still waiting to hear any state politician make a comment about the effect falling home values is expected to have on tax revenue. Anyone want to take bets on how tightly those two things are tied together? Let’s see, if home values drop 30% tax revenue will drop…, well we all know better don’t we.
As for all this new talk by Obama about Americans having to make sacrifices, it calls to mind these words…
Ayn Rand
MikeA on October 8, 2008 at 4:27 PM
I feel your pain. Home values (based on selling prices) in my neighborhood have fallen about 40% since 2005 (and still falling), but my property taxes keep going up every year. I suspect it has something to do with the fact that most of the elected officials here are Democrats. I’m hoping that changes in November. I’m doing my part to make it happen.
AZCoyote on October 8, 2008 at 4:29 PM
All property taxes are outright theft, extortion, and reduce us all to tenant surfs.
LimeyGeek on October 8, 2008 at 4:31 PM
How many illegal aliens receive loans that are now our responsibility?
…….. oh, yeah, they are here just to do jobs that Amercians won’t do, then go back home.
Called it ten years ago, just like this guy……….
Seven Percent Solution on October 8, 2008 at 4:34 PM
…you know, it would help to assess this business if the folks doing OK (their property not being hit badly) and those losing value like Congress is losing credibility, would put down in your post where it is you live…sort of a straw-poll look at property values….
…I’m just nosey, I guess….
Puritan1648 on October 8, 2008 at 4:35 PM
You know what. I’m sick of hearing about the pooooooooor people losing their homes. My sister is upside down in her home in Sacramento California, because she needed a pool, and a new kitchen and bath’s , etc…. I don’t feel sorry for her, I have told her she is stupid! I love her but WTF. She pays interest only on her house and who knows if she will be able to make the payment. Hey you live beyound your means, too bad sooo sad!
Mercy4Me on October 8, 2008 at 4:35 PM
Probably 5 out of 6 stock holders are “upside down” for this year, so let’s bail them out too. The federal government is running such huge surpluses so why not. Ditto Las Vegas, Reno, Atlantic City and Lotto gamblers too. The federal goverment should just cut everyone a check for $1,000,000.00
MB4 on October 8, 2008 at 4:41 PM
You can get a picture of the housing market in an area at Zillow. It’s not a perfect calculator, but it seems to be pretty good. It provides historical averages and regional trends as well.
Y-not on October 8, 2008 at 4:42 PM
My place is in Minnesota, exurb of the Twin Cities. House values are off about $60k but they are rapidly reselling at the new values (median price about $275,000-$300,000). No new houses going up anywhere around except for one guy down the street who built a modestly sized place but decked it out like you wouldn’t believe; paid almost $500k.
I finished my own basement and will take a shot at doing my own landscaping next year if my back can take it. We don’t have the granite or stainless gear or tv’s in every room.
Bishop on October 8, 2008 at 4:46 PM
So now the Constitution guarantees that our equity will always be greater than our mortgage?
WHINERS AND PANDERERS!
PattyJ on October 8, 2008 at 4:55 PM
This is a good thing. Why then do you support McCain’s mortgage renegotitation plan?
fourstringfuror on October 8, 2008 at 5:01 PM
Quit whining and get with the program!
This is the only way we can fix this economy.
SaintOlaf on October 8, 2008 at 5:04 PM
There’s being “underwater” and there’s not being able to afford your mortgage payments.
I like where I live, and checking Zillow, I’m not underwater, but I’m close enough to be within spitting distance. But there’s little danger of me defaulting, because I have to live somewhere and, more importantly, I have no trouble making my mortgage payments. Shee.
It’s not enough to say people are underwater on mortgages. They’ve got to be underwater, and either can’t make the payments or it’s just an investment property.
meep on October 8, 2008 at 5:08 PM
Not really the same thing. Working people are not tied to their stock portfolios the way they are tied to their houses. If your house value falls but you need to move for work reasons, you’re screwed. And if you happen to live and work in an area that is experiencing a major downturn in both housing and jobs, you’re doubly screwed.
I realize we are all unsympathetic to the people who over-bought or were speculators or whatnot, but I doubt they are the majority of the upside-downers. If we had bought in San Bernardino County last year (which we almost did), we’d find ourselves in a neighborhood with foreclosed homes and vacant properties, depressing our home’s value further.
And you know what? People in S.B. are pretty conservative, regular folks who are trying to build a good life for themselves. I’m not from California originally — I’ve only been here a short time — but SoCal still has pockets of Reagan country.
I’m not saying we should be happy about the bailout or buyout, but I don’t think it’s right to be so hostile to people who are facing tough economic times.
Y-not on October 8, 2008 at 5:15 PM
Just fyi — I find Zillow to be a little low in its estimates. It doesn’t do a great job taking into account upgrades and micro-neighborhood effects (parks, schools, etc).
I’m not a realtor, but I used to use it in my work (fundraising). I’d be curious to hear what realtors think about it.
Y-not on October 8, 2008 at 5:19 PM
Hey, this week I ate out 4 times, flew to Florida, rented a car…this week I am upside down, please send me some money…if it is enough, I can be upside down the rest of the year…
right2bright on October 8, 2008 at 5:21 PM
Ed, Green Bay, WI looks like it’s doing fine to me. It’s Detroit/Flint/Saginaw and Battle Creek/Kalamazoo/Grand Rapids in MI that look like they are hurting.
jim m on October 8, 2008 at 5:27 PM
There is a well-documented “wealth effect” that increases consumer spending as consumers feel their wealth is increasing and reduces it as wealth declines. It is not always rational but it exists. People who are usddenly upside down on their mortgges feel poorer, even if they are making their payments and have safe jobs. They will not spend as much this year as they did last year. That ripples through the rest of the economy.
Now multiply that by 12 million households and you have a severe cutback in consumer spending. And no, it is not just people deciding not to buy that third flat screen TV with their credit card. It is people deciding not to buy a new backpack or bike or raincoat for their kid this year. It is office workers deciding that maybe they really don’t have to have a new suit this fall. It is regular families deciding that they will stay home for Thanksgiving this year instead of traveling to see Grandma and staying in a hotel. Or they will only buy two Christmas gifts for each kid this year instead of three or four. These are not huge sacrifices for families, but when you multiply these cutbacks by millions of households, you get real layoffs and real business failures.
rockmom on October 8, 2008 at 5:29 PM
+1 to you, rockmom.
Saying people are getting what they deserve ignores the fact that we are all going to feel it, whether we deserve it or not.
Y-not on October 8, 2008 at 5:32 PM
Cool… I live in Cape Coral, Florida with direct access to the Gulf of Mexico. Needless to say, this place is foreclosure central. I moved here in mid 2005 and my property valuation from the property appraiser’s office has dropped around $125K. Now, I don’t really plan on moving for years and years and I’m paying my mortgage just fine. But here’s the deal… I have a center console fishing boat on the lift behind my house that gets right at 2 mpg when I go fishing offshore, so can I have my 125K in gas coupons or cash so I can buy more gas for the boat? Huh? Can I? Can I?
CC
CapedConservative on October 8, 2008 at 5:33 PM
…thanks a lot….
Puritan1648 on October 8, 2008 at 5:36 PM
…two or three per kid? Which side of beyond do you live on?! If I were to buy four or five gifts at Christmas, it’d be Easter before I was allowed to come out of the crawlspace under our house…Dad better either deliver or sleep with one eye open in my house! My daughter is a diva!
…then again, it’s all about the expectations you set….
…and this, like nothing else, shows why Obama’s a complete ignoramus when it comes to the economy…we all need to tighten our belts…that won’t hurt Wal*Mart or major manufacturers….
Where it hurts will be the small business sector…the guy who depends on discretionary spending…set the expectation of further bad times, and Mr. Brown the customer “discreets” to stop spending, sending Mr. Green the florist into a tailspin….
…a little more understanding of things out on Main Street, and the head pulled out of the sphincter called “ACORN” or “activist economics” or “social justice” — where nobody actually lives and all people are cyphers — and you’d see that every action has an unequal, rippling, multiplying-as-it-ripples reaction….
…and now Pelosi is talking about another $150Bil in “stimulus” money…bread and circuses…
…”stimulus packages” won’t help Mr. Green the florist beyond 12 hours after the checks are cashed…where $150Bil into bridges, roads, general infrastructure, innovation, automation, and other things that require folks to build, supply, direct and maintain just might…per Newt, that is….
…we’re being bailed out into oblivion….
Puritan1648 on October 8, 2008 at 5:49 PM
That’s true! When my sister’s first boy was little she told him that the Disney store was a museum. Pretty smart mom.
Y-not on October 8, 2008 at 5:56 PM
We’re not There, but last year I checked into housing prices in this city at the end of the BART line–Dublin, I think, in the Bay Area, due east of Hayward as you go towards Livermore
$1.1 million for a 2-3 year old 2000 sq ft tract home with a postage stamp yard. Very hot dry summers, mild winters
at the northern end of the Bay Area, it took 1.3 million to get a 20 year old tract home in Healdsburg, in northern Santa Rosa County. About the same in Santa Rosa itself
Janos Hunyadi on October 8, 2008 at 6:05 PM
Even “too big to fail” Bank of America is falling fast. Down another 7% today to 22.
JiangxiDad on October 8, 2008 at 6:28 PM
Man, am I glad the wife and I put 20% down and man am I glad I live in Texas.
thirteen28 on October 8, 2008 at 6:29 PM
We have a tiny 1300-sqft, 3 bed, 2.5 bath townhouse that we bought 3 years ago for 179K (30-year mortgage, VA, no down payment). It’s now worth less than that, partially because housing prices were inflated, and partially because we had gangs move into our neighborhood and it’s gone to crap. We bought because we believed the Navy when they told us about homesteading (yes, our stupid mistake), but now that my husband’s a state away, we’ve been trying to sell since January. Houses are not moving, and neither are we. We have no problem paying our mortgage, but I’d be lying if I said things haven’t gotten rough on other areas, but that’s mostly gas/food prices.
We couldn’t even dump our house for half its value, that’s how bad things are. And this is a mighty sour subject for me, because it is entirely my husband’s and my fault. At least the lesson has been learned for this family.
Anna on October 8, 2008 at 7:21 PM
Actually, they are only worth what someone is willing to pay for them.
Trainwreck on October 8, 2008 at 8:36 PM
I live on Orange County (next to LA). Some areas of OC have retained their values pretty well, but Santa Ana, where a lot of sub-prime mortgages were given to people who couldn’t come close to affording the house they were buying, has cratered in value.
I have two houses, one bought 20 years ago that we rent out. It is in a modest area and has probably dropped 25-30% from the peak of a couple of years ago. The house I live in was bought 8 years ago. It is probably off the peak by about 10-15% at the most. There have been a few foreclosures in our area, people who bought near peak and were probably looking to flip after a couple of years, then freaked when prices started going down. Still, houses sell, not as fast as they did at the peak, but usually in a couple of months max. As long as the area is desirable and there are still some good-paying jobs to be had, the nicer areas will hold their value reasonably well.
All that being said, I though our house was overpriced when I bought it. Even at current prices, I’m still up about 80% from what I paid for it. And no, I’m not rich, and don’t make a huge salary; pretty good, but not huge. I just live within my means, go out for dinner maybe once a week and brown-bag my lunch every day, pay cash for everything but the houses, etc.
Snidely Whiplash on October 8, 2008 at 8:54 PM
When we moved here to TX (Corpus Christi) ten years ago, we went for a no-downpayment home loan with a decent interest rate for a house that was a bank pre-foreclosure (a little below market value for the neighborhood).
A few years later, when interest rates had gone way down and the value of the house appreciated by a good chunk of change, we re-financed and, to our surprise, we were able to stop paying PMI. Now, ten years after we moved in, we are being forced to move to the Houston area, with the help of a relocation company. Now, our current house is worth more than the house we’re about to move into in Houston. (We found this one brand-new house on inventory, for sale at $20 grand + under market value. We are now able to place our current house equity at over 20 percent deposit, with a little money cushion just in case our house sells a little under market value.)
That’s the good part.
The bad part is that my husband found out that one of the credit report agencies bundled his credit report, which had earned exceptional marks in the past, with the one of someone named almost identical to him who lives somewhere else here in TX, who has two car loans and a huge mortgage he defaulted on. My husband has spent days on the phone trying to solve that issue (someone put an A.K.A. on the guy’s file and placed my poor guy’s name on it, even though they have completely opposite SSNs), but the credit agency will not take personal calls – it leaves him on an endless switchboard loop and no warm body on the other line to speak to,- and will not eliminate their mistake. The other credit agencies have been told of the snafu on this one, and they understand, and he still has very high credit scores. But this one has stopped us from closing on our new house loan: it has delayed us by weeks. We are thinking of hiring a lawyer if that credit agency won’t fix this.
newton on October 8, 2008 at 9:18 PM
Thanks for understanding. Here around Detroit if you put 10 percent down on a home in the last few years you have lost double that in value. Since the first few years are mainly interest on a conventional mortgage, you have negative equity here where drops are 20 and 30 percent. And they are.
If like so many you lost your job and were spending your savings to hold the house until it could sell, you do not have a downpayment for a new mortgage, much less to buy out your negative equity on your current mortgage.
Because here the job market was shrinking. People were moving like crazy to follow the jobs. Two years ago there were for sale signs on every block as people scrambled to sell to move out of state, or to another job. But houses had already stopped selling.
When the job market dies, the area becomes undesirable and new people do not move in.
As housing collapses more your job market could be next
Now there are virtually no for sale signs. It is scary. The market has collapsed. Everyone is stuck. Gas is high and underemployed cannot afford a long commute. You wait, for your pension check, or your next unemployment extension check, or the foreclosure notice
A neighbor lost his son in a terrible fire a year and a half ago. The insurance company paid him the current resale value minus the value of the land. That was not enough ($86,000) to build a new house, but he found a modular home builder and gave him half down to build a little home. The guy folded (wonder why) and the money is gone. The insurance company appraised his land at $50K to reduce the payment he received. The land would not sell for half now. And it cost several thousand to demolish the burned home and meet city code.
Consider what replacement value means on homeowner insurance policies even to those who are not in negative equity
A girl I know lost her father to cancer. They could not afford the home without his income but could not sell it because of the negative equity. They lost it, as the mother had developed a serious disease, and then the grandmother.
If a bank holds a mortgage and the liabilities they lose on too many foreclosures. If a bank has packaged and re sold liabilities they gain on high foreclosure volumes because their main profit is the foreclosure fees.
For those who want all the greedy homeowners to tank, understand they will cost you more than you ever dreamed. They will be fighting to get your jobs and increase your tax burden as they transfer to the same ER medical plan the illegals get, and their kids all go on the free lunches at school. They will not be buying the stuff you sell or make, but they will be stealing more of it. They will vote themselves something a lot lot bigger than a bailout if they are not bailed out. Maybe a national health plan, and a lot of government work projects
Because that is the true story in Michigan. Screw the rich flippers. This is not what we have here. I am tired of the insults on these victims.
Let them eat cake if you wish. They are not going to go down silently
entagor on October 9, 2008 at 2:50 AM
Has anybody noticed, if you follow the links, that all of the cities majorly affected are run by Democrats or, in a couple of cases, Independents? There are no Republicans in the mix. Seriously, nearly every single Mayor is a Democrat and the other two are Independents.
There is a connection there somewhere.
Theophile on October 9, 2008 at 3:28 AM
Thank you for having the sense to bring this to our attention :)
One of the most pernicious misunderstandings in our society is that surrounding the concept of ‘value’. This misunderstanding leads most people to believe that their property has ‘a value’ that can be injured by market forces.
Stupid people.
LimeyGeek on October 9, 2008 at 12:08 PM
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