Being underwater is the new norm

At the end of June nearly 1/4 of all homeowners with mortgages owed more on their homes than the home was worth.

Some 24% of owner-occupied homes had mortgage debt that exceeded the values of those homes at the end of June, according to data from Equifax and Moody’s Economy.com. That number rises to 32% when looking at the share of homeowners with mortgages that don’t have equity left in their homes.

Overall, 16 million homeowners are “upside-down” on their mortgages, up from 10 million, or 15% of owner-occupied homes, one year ago.

Nearly 10% of owner-occupied homes now have mortgage debt with loan-to-value ratios of at least 125%, and roughly half of those homes have mortgage debt with loan-to-value ratios of 150% or more.

Negative equity is a crucial element in the foreclosure crisis. The Boston Federal Reserve had this to say on the matter.

negative equity is a necessary condition for foreclosure; people rarely lose their homes when they enjoy positive equity....
The empirical evidence on the role of negative equity in causing foreclosures is over-whelming and incontrovertible. Household-level studies show that the foreclosure hazard for homeowners with positive equity is extremely small but rises rapidly as equity approaches and falls below zero.

With that in mind, consider what the Deutsche Bank had to say today about America's real estate situation.

(Bloomberg) -- Almost half of U.S. homeowners with a mortgage are likely to owe more than their properties are worth before the housing recession ends, Deutsche Bank AG said.

The percentage of “underwater” loans may rise to 48 percent, or 25 million homes, as prices drop through the first quarter of 2011, Karen Weaver and Ying Shen, analysts in New York at Deutsche Bank, wrote in a report today.

Let that sink in for a moment: half of all mortgaged homes will be underwater before the economy starts turning around for Main Street. 25 million homes will be at risk of foreclosure.

I guess Deutsche Bank didn't get the memo about the Green Shoots.

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3.2M this year

I believe that was the projected actual foreclosures.

While this is astounding, I think maybe you should note you are claiming there is a foreclosure connection simply due to someone owing so much more than a home is actually worth.

But I see another view...the great ATM of America just turned into the credit card with that lovely high balance and a default interest rate.

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Negative equity creates a huge problem with home sales.

This may causing other problems besides foreclose risks. A person who may want to purchase a new home or just relocate may not be able to if they have negative equity. Most people don't have the extra cash to pay-off remaining balance of mortgage loan after sale.

RebelCapitalist.com - Financial Information for the Rest of Us.

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Feral Houses

Here's a new term that I haven't seen before. It might catch on.

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That's cool

Several cities. Detroit, Indy I know of have landbanks operating. Basically the idea is to try to raze the house, and use the land for something else.

Urban farms are popping up, and it's actually very cool, because being able to drop fresh food directly into the market saves on transport costs. Cities in Cuba, Havana in particular get most of their fresh produce from within the city boundaries.

There's no reason we can't do the same.

Even cooler (quite literally given the effect trees have on microclimates) is the idea of urban orchards.

Basically you take a shitty little lot where there was a crack house, you can raze the house. Plant trees, drop in gravel pathways, plant English ivy or other low maintenance groundcover around the trees. And the crackhouse goes from dragging the neighborhood down to building it up. And if cities do them right (gates are essential for the night) they become low cost pocket parks.

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more on foreclosure wave

mortgage.freedomblogging.com (haven't people learned the art of domains and redirects?)..

has a graph that will show the tsunami approaching land.

big h/t (CR)

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More negative data

A lot of this underwater data is consistent with some commentary that Mark Hanson, of the Field Check Group, recently made. Mark is considered to be a leading expert on the housing market, and isn't afraid to speak out bearishly in the media, which I find refreshing and very important considering the biased news often coming from the MSM.

His full comments are below, but as a quick summary of some of his main points are that while the recent data suggests that the market has stabilized, this is due in part to government intervention and programs that are temporarily helping. However, once these temporary measures recede, the middle and upper ends of the market will succumb to many of the same pressures that hurt the subprime market. This will in turn cause the markets to suffer substantially again, essentially creating what he calls "Mortgage Implostion 2.0" And if this occurs alongside Deutsche Bank's predictions mentioned above, it is going to get very ugly indeed.

"After a year or so the real pain will occur when the mid to upper bands are down 40% from where they are now, and the price compression has made the low to low-mid bands much less attractive – the very same bands that are so hot right now. Rents are tumbling and those that bought these properties for investment will be at risk of default (investors have been buying all the way down). Investors have just started to get taken to the woodshed from all of the supply and this will get much worse. Mid-to- upper end rental supply is also flooding on the market making it much better to rent a beautiful million dollar house than putting $300,000 down and buying.

After investors are punished -- and with move-up buyers gone for years – it will leave first-time homeowners to fix the housing market on their own. Good luck and good night. Five years from now when things look to be stabilizing, all of these terrible kick-the-can-down-the-road modifications that leave borrowers in 5-year-teaser, ultra-high-leverage, 150% LTV, balloon loans will start adjusting upward and it will be Mortgage Implosion 2.0. These loan mods will turn millions of homeowners into over-levered, underwater, renters and ensure housing is a dead asset class for years to come.

Due to a confluence of events including a national foreclosure moratorium and near-zero sales in the mid to upper end during the off season, the broader housing data show signs of stabilization. Taken in context, it is a blip.

There are no silver linings or green shoots in housing whatsoever other than by these first-time homeowners – former renters – who now find it cheaper to own than rent. This is a very good thing, but it only applies to a small segment of the population and will not be able to support the market. In addition, the first-time buyers who come out of the rental market put continuous pressure on rents.

Our data shows that the mid-to-upper end housing market is on the precipice of the exact cliff that the market fell off of in 2007, led by new loan defaults. What happens to the economy when you hit the mid- to-upper end earners the same way the low-to-mid end was hit with the subprime implosion? We will find out soon enough. When we look back on housing at the end of 2009, anyone that made positive housing predictions this year will not believe how far off they were."

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