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Rise Of The Underwater People

Back on February 12, I wrote about underwater mortgages (owing more that the house is worth) in the post “Turning Japanese.” I said:

Earlier today, Reuters reported that more than 30% of U.S. homeowners who bought in the last two years owe more on their mortgage than their house is currently worth, according to housing market research company Zillow. Chris Sanders wrote in “Third of recent buyers owe more than home’s value: report” that 39% of homebuyers from 2006, who placed a median 10% down payment on the property, are now underwater (owing more than the house is worth). 30% of those who purchased homes in 2007 also have negative home equity, Zillow said in its quarterly home value report. Overall, less than 1% of all American homes are underwater at this point in time.

The next day, I came across a Bloomberg piece by Kathleen Howley entitled “Americans Selling Homes See Prices Go Below Mortgage.” She wrote:

By the end of this year as many as 15 million U.S. households may owe more on their mortgages than their homes are worth, according to an estimate from Jan Hatzius, chief U.S. economist of New York-based Goldman Sachs Group Inc. That may fuel an increase in foreclosures, erode prices, and increase mortgage bond losses, he said in a Feb. 1 report.

Today, Reuters reporters Julie Haviv and Jennifer Ablan said in “One in 10 home loans is under water: Economy.com” that nearly 8.8 million homeowners, or 10.3% of American homeowners, are underwater, according to Moody’s Economy.com. As a result, they said, millions of U.S. homeowners have an incentive to abandon their properties.

“Jingle Mail”
© 2008 Christopher E. Hill

Edmund L. Andrews and Louis Uchitelle wrote about the rise of the underwater people in the New York Times today. In “Rescues for Homeowners in Debt Weighed,” they said:

Not since the Depression has a larger share of Americans owed more on their homes than they are worth. With the collapse of the housing boom, nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater. That is more than double the percentage just a year ago, according to a new estimate of the damage by Moody’s Economy.com…

Andrews and Uchitelle added:

For Americans caught in a mortgage trap and owing more on a home than it would sell for, consumer spending and confidence are the most immediate casualties, Mr. Curtin reports. But the damage goes deeper.

People cannot move easily to jobs in other cities if they have to sell their homes at a loss. The $168 billion federal stimulus package is likely to be less effective than intended because many homeowners may simply use their government checks to pay down their debts.

Even worse, Mark Zandi, chief economist at Moody’s Economy.com, predicted home values will continue to slide in the near future. This past Wednesday, Reuter’s Haviv and Ablan said in “Economy.com sees home prices down 20 percent” that the “rapidly deteriorating U.S. economy will cause home prices to drop by 20 percent peak-to-trough,” according to Zandi. In addition, the co-founder of Moody’s Economy.com is also predicting a recession in the first half of this year. According to Reuters:

Zandi, speaking at the Reuters Housing Summit in New York, said this is a “significant” change from the Moody’s Economy.com outlook published in December, which called for a 13 percent drop.

On the outlook for recession, Zandi said:

Three months ago, I expected the economy to skirt a recession. Now, I expect it to suffer a recession (in the) first half of 2008. To be more precise, the economy is contracting. It’s been contracting for December, January and probably February. Another three, four, five months of contraction and that would be a recession.