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May 11th, 2011

Where do we stand on the whole “underwater” situation?



Housing Market Trending DownIt’s not good; in fact, it’s getting worse.

You know what they say, “No news is good news.” Unfortunately these days, no news tends to mean it’s just old news.

Like most of us, I have been following the decline in home prices rather closely for the last few years. I’ve blogged about it, my colleague and HSH.com VP Keith Gumbinger has talked to the national media about it, we’ve written articles and forecasts about it, and even devised our own plan to help underwater borrowers refinance.

A story that needs to be told

But after a while, there isn’t much new or encouraging news to report. However, Zillow’s Chief Economist Stan Humphries summed it up best when he told Bloomberg, “We get tired of telling such a grim story, but unfortunately this is the story that needs to be told.”

So, where do we stand with the whole underwater situation here in the U.S.? According to Zillow, more than 28 percent of all homeowners in this country were underwater in the first quarter of 2011, as we observed home prices fall “the most since 2008.”

Problem seems to be getting worse

Perhaps the news in all of this is that the problem seems to be getting worse:

Homeowners with negative equity increased from 22 percent a year earlier as home prices slumped 8.2 percent over the past 12 months, the Seattle-based company said. About 27 percent of homes with mortgages were “underwater” in the fourth quarter, according to Zillow, which runs a website with property-value estimates and real-estate listings.

Home prices fell 3 percent in the first quarter and will drop as much as 9 percent this year as foreclosures spread and unemployment remains high, Zillow Chief Economist Stan Humphries said. Prices won’t find a floor until 2012, he said.

Home prices finding a floor is only the beginning. I can remember blogging seemingly constantly back in 2009 that economist were almost certain that home prices found a bottom. But as we all know, some two years later, we’re still waiting for home prices to find their low point.

It’s not all about home prices

If you’re a potential homebuyer that’s in no apparent rush, you’re more than content to sit on the sidelines and wait for prices to hit bottom so you can snag the best deal on your investment as possible. (Yet, buyers be warned, it’s not all about home prices. As loan officer and HSH.com’s contributing writer Dan Green will tell you, snagging the best possible mortgage rates as opposed to the cheapest properties may save borrowers the most money over the long term.)

But if you’re a homeowner, especially one that’s looking to sell, this waiting game is far more frustrating and far less fun. While Zillow thinks prices will bottom out next year, we forecast (in late 2009/early 2010) that your negative equity wouldn’t return to zero until 2015.

We may be waiting even longer

Here’s what’s scary: the return of home equity, as discussed in our article “Home equity: Why 2015 is the new zero,” may not return in 2015 as we speculated, it could be even later. Here’s why:

We can’t say for sure what will happen with prices in the future, but since there have been some signs of leveling off, we assumed that through June 2010 there will feature a 0% rate of increase or decrease, followed by a 14-month period of 2% annual price increases, then a 12-month period of 2.5% gains before finally settling in to a flat 3% annual increase going forward.

Period Assumption
Jan 2006 – Oct 2008
Nov 2008 – Nov 2009
Dec 2009 – June 2010
July 2010 – Aug 2011
Sept 2011 – May 2015
June 2015 – July 2016
Aug 2016 – July 2022

As we all know, since June 2010, home prices have continued to move in the wrong direction. While that development certainly isn’t breaking news, it’s news that needs to be delivered, and news that’s bound to impact nearly all of us moving forward.

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About the HSH Blog

HSH.com's daily blog focuses on the latest developments in the mortgage and housing markets. Our mission is to relate how changes in mortgage rates and housing policy, as well as the latest financial news, impacts consumers, homebuyers and industry insiders alike. Our 30-plus years of experience in the mortgage industry gives us an edge as we break down the latest changes in an ever-changing market.

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Tim Manni

Tim Manni is the Managing Editor of HSH.com and the author of their daily blog, which concentrates on the latest developments in the mortgage and housing markets.

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