Tuesday, August 12, 2008

Houses Underwater

This article from Bloomberg titled Many U.S. Homeowners Owe More Than House Is Worth, Zillow Says is pretty alarming. People can not refinance, can not sell, are just stuck. Unfortunately as the article illustrates the only way out for many ends up being foreclosure. Hopefully lenders start to streamline the short sales option. We are at a point where there are no good options - just a choice between what is the best of the difficult. Let's take a look -

Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.

Second-quarter home prices fell 9.9 percent from a year earlier, giving 29 percent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 percent are now underwater, Zillow said.

Negative equity and declining prices are making it difficult for homeowners to sell property for a profit. Almost one-quarter of U.S. homes sold in the past year were for a loss, Zillow said. That contributes to the foreclosure rate because some homeowners can't absorb the loss and end up surrendering their homes to the bank that holds the mortgage, said Stan Humphries, Zillow's vice president of data and analytics.

Of course some of the hardest hit areas were in California.

The highest percentages of homeowners with negative equity were located in California. In four of the state's metropolitan areas -- Stockton, Modesto, Merced and Vallejo-Fairfield -- the number of homeowners whose mortgage debts exceeded the values of their properties topped 90 percent, Zillow said.

In five more California areas -- the Inland Empire (Riverside-San Bernardino), Bakersfield, Yuba City, El Centro and Madera -- the percentages were more than 80 percent.

Ninety percent of the homeowners that bought in these California communities within the last 5 years are underwater! Now that hurts. We know that with falling prices that some properties are worth less than half of the peak prices. The financial situation of many of these homeowners will take years to get back in the black. The brutal economics of the bubble implosion will take years rectify. With some areas never returning to the glorious bubble days.

1 comment:

Anonymous said...

I think part of the problem regarding a bank's unwillingness to do a short sale is the inability of the bank to issue a 1099. Ever since the feds took away the bank's ability to hit an underwater homeowner with the difference between short sale price & mortgage balance as taxable income (punishment) the banks have decided to let folks choke on their houses. While this will eventually bite the banks in the butt just as hard, it will take a while to get to that point. I figure most banks are hoping for free money from Uncle Sam before they reach that point anyways, so they keep pushing problems out into the future.

Even if they could split up the difference over 5 years and issue a 1099 each year, the bank/IRS would get their pound of flesh but the homeowners would be able to get into affordable housing (and not without a good beating). Both parties save face, and it makes more sense than banks simply eating principal and the homeowners walking away fat dumb & happy.