The Underwaters

Not surprisingly many people are underwater - owe more on their house than it is worth. A lending system that required little or no money down coupled with a significant drop in property values has caused this number to skyrocket. Of course those areas with the biggest gains are currently having some of the biggest falls. So even in places like Miami if you 20% down at the house peak you are probably underwater anyways. Not good news. The level of underwaters is profiled in this Wall Street Journal article titled Housing Pain Gauge: Nearly 1 in 6 Owners 'Under Water'. Lets take a look -

The relentless slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year.

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And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home's value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.

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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.

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In contrast with the 12 million home borrowers estimated to be under water, 64 million have equity in their homes. These include 24 million households who own their homes free and clear, and 40 million whose homes remain worth more than is owed on them.

And the downward spiral continues. Houses worth less. No refinancing and no more equity withdrawal. Just adding to the credit crunch.

Also note the problems involved in remedying the situation. Even if you are not underwater you are feeling an enormous amount of stress right now. And the anger of helping people out who bought with nothing or took risky loans will make all those who played it safe very, very angry and resentful. The 40 million who are paying their mortgages but are not underwater can not be ignored in this whole mess. Hand-holding the underwater at the expense of the rest is going to compound problems not alleviate them.

Here is an interesting chart from the article showing the drop since the peak and the number of recent purchasers underwater. The drops in Arizona, Florida and California are huge. Those are some pretty alarming numbers. The biggest challenge is to keep those underwaters from going straight back to the bank either due to foreclosures or walking away. One final note is that the last few years of the bubble involved option-arms which almost by design puts people underwater. How many of these purchasers are that heavily underwater.

There are also some interactive maps with the original article.