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One-Third of Home Loans are Under Water

This article was written by in Real Estate and Home. 12 comments.


A few years ago, a coworker formed an investment partnership in speculative real estate. He promised investors a 10 percent annual return and was using the capital to invest in Florida real estate, earning 15 to 20 percent overall. As most of the real estate had not even been inhabited or built yet, the investments were pure speculation. I haven’t been in contact with this individual, but I am wondering how this business is doing in this real estate market.

If you have a mortgage on a house you purchased recently, there is a good chance you now owe more on this loan than your house’s market value. These chances are even greater if you bought into the speculative markets in Arizona, Nevada, or Florida like my former coworker.

Owing more on your loan than the house is worth is not the worst financial situation, but it is risky. If you need to sell your house, you would still have to raise more money to pay off the remainder of the loan. If, on the other hand, you are lucky, you can remain in your house long enough to continue paying off the loan and to wait for home prices to return to the average rate of appreciation of about 3 or 4 percent. Eventually you could come out ahead.

If you find yourself in this position and you care not to be, you can make the time work harder for you rather than against you by increasing the payments towards your mortgage. A pure analysis of the numbers might say that it’s better to invest in the stock market rather than pay off your mortgage faster, but that doesn’t account for the risk of staying in a house whose loan is under water, and that risk can be measured differently by different families in different situations.

Foreclosure

Robert Kiyosaki popularized the idea that a house is a liability. He is, of course, technically wrong. A house, and anything you own is an asset, while a mortgage, and anything you owe, is a liability, despite any marketing materials that try to redefine the words. But when your mortgage is higher than the market value of your house, you have negative equity, and that asset is not looking so helpful on your balance sheet.

This negative equity is mostly a result of speculative investing. The news that so many homes are under water invites criticism of home owners who bought a larger or more expensive house than they could afford and have now suffered the effect of a downturn in the real estate market or interest-only mortgages than have now adjusted to include principal payments. But that is only a small problem in this market, it is the speculative investing that accounts for the under water loans.

The areas that were identified as the largest contributors to the total number of home loans under water were the locations that saw some of the biggest increases in home prices as investors gobbled up as much property as possible. These investors intend on selling more frequently than a typical home owner, so they are more vulnerable to the market downturns that result in negative equity.

Are you under water with your home loan? Are you doing anything about it now or are you waiting for home prices to return?

Almost one-third of home loans under water, Emily Glazer, MarketWatch, August 13, 2009
Photo: respres

Published or updated August 16, 2009. If you enjoyed this article, subscribe to the RSS feed or receive daily emails. Follow @ConsumerismComm on Twitter and visit our Facebook page for more updates.

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About the author

Luke Landes is the founder of Consumerism Commentary. He has been blogging and writing for the internet since 1995 and has been building online communities since 1991. Find out more about Luke Landes and follow him on Twitter. View all articles by .

{ 12 comments… read them below or add one }

avatar Tiffany

I can believe it. We’ve been house-hunting, and the first house we put an offer on was a short-sale. It took a month for our offer to be rejected. With the house we now have a contract on, the sellers are having to take out a loan to pay for closing costs and commissions. They only bought the house a year ago, and are selling it for about $10k less than they bought it for.

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avatar rebecca

As the owner of one of those upside-down loans (in AZ) I have developed a real hatred for speculators. We bought our house in 2004, before the real craziness, and had more than 20% equity in it. We have lost that and more. (We estimate we are now more than 10% underwater.) We bought less house than we could afford. We did all the right things and are still in a horrible financial situation. Most of our friends are in a similar position.

Worse, it is starting all over again. Newpapers here are reporting two key things; first that the market has overcorrected and houses are a bargain, and second that there are bidding wars going on now for most properties (especially foreclosures and short sales) because the speculators are back and betting that the overcorrection theory is correct. A couple who recently bought lost FIVE houses to speculators outbidding them.

I have moments when I think that selling this place as soon as it’s above water and renting might be a better financial move…

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avatar Funny about Money

Ditto Rebecca!!!!!

On the other hand, I can’t bring myself to hate the speculators. They simply took advantage of circumstances that were delivered to them on a golden platter. I lay the blame right at the feet of the folks who ran this country under the belief that less regulation is better. Lack of regulatory oversight brought us to our present pass.

Some speculators in this current round of frenzied buyers are actually making things better.

When the proprietor of Dave’s Used Car Lot, Marina, and Weed Arboretum (the eyesore across the street) finally went belly-up, a bottom-feeder grabbed the house off the courthouse steps for a song. He shoveled out the hazardous materials and the worst of the weeds, and then sold it to a speculator. She came in and did a decent fix-up on the place. And she sold it for to a very nice couple who — hallelujah! — are keeping it up! I no longer have a shack across the street that’s so ugly I used to keep my frontyard plantings overgrown so I didn’t have to look at the mess out my front window, and without a slum house in our part of the neighborhood, over time all the neighbors’ values will increase.

My son and I are underwater (possibly: reports vary) on the house he and I copurchased as a long-term investment and as a place for him to live. However, a) we have no intention of selling in the near future, and you don’t realize a loss in real estate until you sell; and b) my house is paid off and is worth significantly more than that place — if he needs to move (job change, new wife??), I will simply sell my house, buy him out, and move into that place. My house is too big for me to continue hassling with into my old age, and his house is cuter than life, small enough to be easy to care for, and freshly renovated. So…I guess the point is, when we bought the place we had the resources to pay the mortgage in full, if we so chose.

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avatar Danielle

I am underwater on my mortgage. I am not doing anything about it because I don’t know of anything TO DO about it. If you have any suggestions, I’d love to hear them! I owe approximately $310,000 and comparable condo units in my neighborhood are selling at approximately $210,000.

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avatar Luke Landes ♦127,500 (Platinum)

Well, what most people will probably do is just hold on as long as possible, continue to make mortgage payments, and don’t move until the value returns. But you could consider moving elsewhere and renting out the house, starting over with a more affordable home, and using the rent to cover the mortgage on the first house.

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avatar Kira

I also live in AZ and am approx 60% upside down on my mortgage. When I first moved out of it, I couldn’t sell it since I was approx 20% upside down. So, I rented it and have been adding approx $500 per month to the rental income to make the payments for the last 2 years.

Ironically enough, I bought my house from a speculator back in 2005 who owned it for a month, bought it with cash, and turned around and sold it 30 days later for $30K profit. While he helped inflate the value of my home, I don’t blame him as I voluntarily chose to pay that much.

Speculators are not the ones that made this housing market crash though. People spending more than they make and using their house as an ATM to pay off credit cards, buy more crap, and repeat ad nauseum. Eventually, wages could not keep up with monthly payments, and the Variable Rates lit the match for the forest fire.

If I could refinance based upon the way I take out any other loan (comittment to pay X at Y percent for so many months), then I could drop the rediculous 6.6% and 9.2% loans I have on my house in the first place, make my payments lower AND STILL pay off more principal. However, the market being upside down as it is, does not allow me to do that because of the value of the home.

I have friends who live in a place a mile north of mine, both gainfully employed responsible married adults. Thru this they watched their neighborhood turn into Compton with graffitti, squaters in vacant homes, and vandalism, all while their home values continued to plummit.

He did some calculations and figured out it would take approx 8 years for his home to come back up in value so that he could sell it for what he owes, meanwhile still living in that crappy vandalized neighborhood. Or, they could move, rent in a nicer community, closer to work, for less money and a bigger home and forclose on purpose on the other property. Guess which one him and his wife chose?

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avatar kelly girl

I am in a similar situation. Could you please let me know what steps him and wife made?
Are they happy with that decision? Do they own a home now?

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avatar SingleGuyMoney

When I bought my home in 2006, I paid $189k and it appraised for $192k. I just refinanced my mortgage a couple of months ago and had to have the property appraised. The value had fallen about $10k to $182k. My new loan is a little under that amount but if I had to sell the home quickly, after paying all the costs and fees, I would have to come out of pocket with a few thousand dollars.

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avatar kelly girl

Did you have a Freddie Mac or Fannie Mae loan?

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avatar kitty

Mine is paid off. Even if it hadn’t been paid off, I bought it in the 90s for 180K with 140K mortgage, and it is now worth around 400K, so even if I had had mortgage I’d still have plenty of equity. The prices in NY didn’t go now nearly as much as in some other states; plus we had a real slump in the 90s with prices ridiculously low, especially on condos (mine is townhouse style condo). When I bought this place 10 years ago, the lady who sold it to me had to add her own money to cover her mortgage. But… she bought a house in Florida instead presumably cheap too. I am not sure how she made out — I don’t think even in Florida prices are below the 90s level.

This is why I am a bit surprised to read about 1/3 of home owners being underwater. Did 1/3 of homeowners buy a home in 2000s? What happened with people who bought before that? Surely people who bought in the 90s or 80s aren’t underwater?

@Rebecca: “I have moments when I think that selling this place as soon as it’s above water and renting might be a better financial move…” — think how much you’d have to pay in rent, also that the rent will go up. Prices go up, prices go down. Eventually they’ll go back up. Now if you start seeing another bubble forming and if you are not attached to your home, you can sell and wait for prices to come down again. But as the real estate prices change direction slower than the market, it may make sense to wait until prices go up and then start to slowly come down again – if we indeed get another bubble/bust.

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avatar Anonymous

BIG mistakes I’ve witnessed people make:

1.) Early retirement with a portfolio still mostly growth stocks
2.) Always keeping a new car in the driveway (buying/leasing new every year or two years)
3.) Borrowing against equity to pay off credit cards / secured debt, then running the cards back up again
4.) Reverse mortgages
5.) Home equity loans to make frivolous purchases or something they “just can’t live without”

We achieve our standard of living by false means, and are paying out the nose in interest and finance charges. Even what’s considered a good interest rate will really add up on loans spanning 5+ years. An 8% interest rate on a $16,000 balance will accrue over $4,000 in interest charges over 5 years.

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avatar darkautumn

BIG mistakes I've witnessed people make:

1.) Early retirement with a portfolio still mostly growth stocks
2.) Always keeping a new car in the driveway (buying/leasing new every year or two years)
3.) Borrowing against equity to pay off credit cards / secured debt, then running the cards back up again
4.) Reverse mortgages
5.) Home equity loans to make frivolous purchases or something they “just can't live without”

We achieve our standard of living by false means, and are paying out the nose in interest and finance charges. Even what's considered a good interest rate will really add up on loans spanning 5+ years. An 8% interest rate on a $16,000 balance will accrue over $4,000 in interest charges over 5 years.

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