Not surprising, but sobering numbers”¦
The Wall Street Journal reports that the number of people underwater on their mortgages (those who owe more than the property is currently worth), has increased to 23% nationally.
Arizona is second only to Nevada with 47.9% of all home owners with a mortgage having negative equity in the third quarter of 2009. Another 4.5% are classified as “near negative” ”“ within 5% of being in a negative equity position. (Nevada is at 65% / 3.7%)
Yep, drive through a neighborhood in Arizona and statistically speaking, every other house you drive by is worth less than what is owed on it. Drive through a development built in the last five years and the odds are outstanding that every homeowner is underwater.
Depressing, isn’t it?
Oklahoma, New York and Montana all have less than 7% of mortgage holders in a negative equity position. Florida, Michigan and California round out the top five in underwater borrowers.
I don’t really want to get off into why half of Arizona is underwater on their mortgage. There are lots of reasons ”“ ridiculously lax lending practices in the near past, poor choices by lenders and borrowers, accepting crappy advice like, “Don’t worry, in a couple of years you can just refinance”, irrational exuberance, and investor frenzy all come immediately to mind. We could discuss all of these for a significant portion of the rest of eternity.
What’s it going to take to fix this?
I don’t know.
A homebuyer tax credit won’t do it.
There are lots of calls out there for loan modifications that include a principal reduction component. You think the banks are going to reduce principal balances on HALF the mortgages in Arizona? On a fourth of the mortgages across the country?
Time, and a lot of it, is the most likely answer. Quasi-regular readers know I’m not a fan of Big Brother Government mucking about in the market. The Law of Unintended Consequences is a scary thing. At this point, I don’t think the government could fix this even if they had a clue. Look at the numbers in this WSJ interactive chart — $12.8 trillion dollars of property value and $8.9 trillion in outstanding mortgage debt. That’s a 70% LTV (loan-to-value) ratio nationwide. Arizona’s LTV is 91%. Ninety-one percent.
These are mind-boggling numbers folks.
If the government must get involved, streamlining the short sale process might help. I can’t tell you how many buyers we’ve had that walk away from a short sale transaction because they grow weary of waiting, 5, 10, 20 weeks or more to get a reply from a lender. If the short sale process was even remotely reasonable we might actually be able to bleed off some of this inventory, impact the supply and demand curve and see home values begin to appreciate ”“ hopefully at a reasonable pace, not the patently absurd frenzy of a few years ago.
Until that happens (IF that happens), more homes are likely headed into foreclosure, putting too many homes on the market, increasing supply which will result in downward pressure on prices.
It’s a vicious circle.
There is no question there are some great buying opportunities out there. Yesterday I showed homes in the $125K range that would have cost $200K a couple of years ago. That’s great for the buyers. Conversely it’s lousy for the sellers. But every buyer needs to understand that as low as prices are, that doesn’t mean we’ve hit bottom and there is never any guarantee that home values always increase. Obviously that is a fallacy. The WSJ report indicates 11% of borrowers who took out a mortgage this year already owe more than their home is worth. The days of buying a home and selling it in a few months (or few years) for profit are over.
At least in this neck of the woods.
What am I missing? What, if anything, can the government do to stabilize the housing market? Should they do anything or should they let market dynamics play out?