Where Homes Are Worth Less Than the Mortgage aka “Underwater Housing”
by Tom on November 28, 2008
in Market Musings, house prices
The New York Times has an interesting graphic with information on the percentage of homes that are “under water.”
Where Homes Are Worth Less Than the Mortgage – Interactive Graphic – NYTimes.com.
A couple of thoughts about this report:
1. For the last several years, we’ve seen an increasing “wealth” effect where people felt more inclined to spend money because the value of their homes was going up.
2. Now we are and will for a long time see the opposite effect as people feel less wealthy (poorer?) because they don’t have as much equity in their houses. I expect that the retailers are feeling that today as the “black Friday” sales are not going to be nearly as good or as profitable as usual.
3. The true effect of people who are underwater on their houses haven’t yet been felt. Here’s my view of it:
- Those who owe just a little more and plan to stay for a long time AND their finances seem to go okay will be fine.
- Those who owe a HUGE amount more than what their house is currently worth and don’t plan on staying there a LONG time, are going to be increasingly likely to walk away from it.
- Those who owe a HUGe amount more than what their house is worth and run into financial problems (layoffs, medical issues etc.) are going to be more inclined to say, “I’m out of here.”
What’s that going to mean for the housing market? A couple of things:
- Increasing levels of foreclosures, especially in states with a high percentage of underwater home owners.
- Increasing downward pressure on home prices.
- Reduced sales of homes going forward because of the number of people who can’t move because they can’t sell their home.
4. The other thing that this graphic shows is how the new Paulson plan, the plan of the week, the plan where he’s buying mortgages that Fannie and Freddie own will not be as effective as it would otherwise because:
- Many homeowners can’t refinance because they owe more than what their house is worth. I’ve already had a number of past clients who want to refinance but can’t because of the value.
- Many of the people who might want to buy a new home if rates dropped substantially aren’t necessarily going to be able to because their house isn’t worth enough for them to be able to sell it and get a downpayment out and move on.
I’ll have more later. Let me know if you have questions.
Thanks!
Tom Vanderwell
