Its Murky Underwater

The definition of being underwater on a property essentially means that the current value is less than the original mortgage. According to Zillow, industry practice is to exclude principal payments and equity extraction from the data analysis. So someone may be technically underwater, but the actual amount due on the mortgage is really less then the amount due. Or someone may not be technically underwater, but since the equity has been extracted through a HELOC over the years they really do owe more than the property is worth.


There is also the other pre-qualifiers for underwaters, commonly the data is only for people that currently have mortgages on their property. Since, supposedly, 32% of all properties do not, yes NOT, have mortgages they are not included in the data. Also, the data is usually only for owner-occupied premises with 1 to 3 housing units on the property. So deducting another 52,556,000 million homes which include vacant properties, seasonal homes, rental units, new construction, and mobile homes. The final pool of possible underwater is 46,461,000 - all the owner-occupied properties that actually have mortgages on them. This is 46,461,000 out of 128,203,000 housing units. Which is only 36% of all the housing units in the first place.

Next is the Zillow press release regarding underwaters we will through in a few paragraphs about foreclosures and short sales as well. Lets take a look at the widely cited release -

Foreclosures(4) made up nearly one in five (19.9 percent) of all transactions in 2008. The hard-hit Central Valley in California continued to lead the nation in foreclosures, as more than half of all sales in the Madera, Merced and Stockton metropolitan statistical areas (MSAs) were foreclosures. The New York City metro area and the Grand Junction, Colo., had the lowest rates of foreclosure in the country (both at 3.9 percent).

For the first time, Zillow has also calculated short sales(5). Across the country, 10.9 percent of all real estate transactions in 2008 were short sales. The Lincoln, Neb., MSA led the country in the rate of short sales, with 14.1 percent of all transactions. In the San Jose, Santa Rosa and Santa Cruz, Calif., MSAs, short sales made up more than 11 percent of all transactions.

As home values declined through 2008, more American homeowners have become underwater on their mortgages. At the end of the year, one in six (17.6 percent) of all homeowners had negative equity(6). This number rose from the end of the third quarter, when one in seven (14.3 percent) homeowners was underwater.

As we noted in an earlier post about the possible differences of what "all" may mean in this analysis here -

Also, the 17.6 percent underwater hopefully the are just for the 68% owner occupied ones that actually have mortgages. If 17.6% of all houses (including rentals) are underwater that means approximately 19,481,792 properties are underwater. If it is just for all the owner-occupied properties the would be about 13,313,872. And if it is owner occupied with a mortgages the number underwater would be 8,177,136. None of these numbers are good, but there is a huge difference between almost 20 million properties being underwater and just over 8 million.

Then through a Housing Wire post titled One in Six Borrowers Underwater on Mortgage, Zillow Says the following -

But by far, the overwhelming picture painted for 2008 was one to forget for housing. And if Zillow’s estimates of the number of underwater borrowers are correct — First American CoreLogic has estimated that 7.6 million U.S. households were underwater on their mortgages as of Oct. of last year — we have much further to go to complete a correction in many of the nation’s key housing markets.

We can see the number given from an American Core Logic report published last October, the 8 million mark give or take sounds correct. The problem is the vague method used to describe these numbers.

Finally there are two ways to report this 8.177 million properties underwater - the headline grabbing method of 17.6 percent underwater!!! Or a lower percent using all owner occupied but less grabby - 10.8 percent. We do not want to include the rental units - since unfortunately there seems to be no reliable statistics regarding the financial status of 35,045,000 housing units. Which could easily be the most alarming part of this whole story!