Does Underwater = Foreclosure ?
A very interesting WSJ article in the family finance section on what it means to being underwater in a home, and how it plays out in the foreclosure crisis.
All the talk of underwater households really depends upon whether you were a first time home buyer or not.
Those people who sold one house and bought another are in a less difficult circumstances than the first timers. I wonder how many people are in situation similar to mine: We sold a house for an big gain (100%) in 2006, and bought a home that is now a little underwater. But the reality is that the loss on the current home is about the same as it would have been on the prior house; had we not moved, we would have had that much less of a gain on the old house. And when we move again, the loss on this house is likely to be offset by the decrease in price on the next home.
Here’s the WSJ Excerpt:
The number of underwater homeowners — those who owe more on their mortgages than their home is now worth — has been growing sharply since 2006 as real-estate prices have tumbled. By some estimates, between one in six and one in eight homeowners are in that position, most of them people who bought homes in the past few years or who put down small or no down payments.
This worries economists and policy makers, since owing more than your home is worth is the first step toward foreclosure. And it’s a concern to the rest of us because foreclosures are roiling the financial markets and, closer to home, they drag down our neighborhoods. (Most people who still have equity, by contrast, would rather sell their houses at a loss than lose what’s left of their investment.)
In response to concerns about rising foreclosure and delinquency rates, federal regulators are studying possible new programs aimed at needy homeowners. There are concerns that such programs could attract a flood of applications from those who don’t truly need assistance or encourage lenders to push homeowners into foreclosure. At the same time, lenders such as J.P. Morgan Chase and Bank of America have committed to working on new loan terms for the most-distressed homeowners.
Coming up with a realistic plan to avoid some foreclosures will be a challenge. And prices are still way too high.
>
Previously:
Fixing Housing & Finance: 30/20/10 Proposal (September 2008)
http://www.ritholtz.com/blog/2008/09/fixing-housing-finance-302010-proposal/
Propping Up Home Prices, Stopping Foreclosures (November 3, 2008)
http://www.ritholtz.com/blog/2008/11/propping-up-home-prices-stopping-foreclosures/
Source:
‘Underwater’ Need Not Mean Foreclosure
Why Most People Who Owe More Than a Property’s Worth Will Still Keep Their Homes
KAREN BLUMENTHAL
WSJ, NOVEMBER 5, 2008
http://online.wsj.com/article/SB122583941535198573.html
See also:
Where Housing Crashed Hardest
NYT, August 24, 2008
http://www.nytimes.com/slideshow/2008/08/24/business/0824-MERCED_index.html
November 5th, 2008 at 7:42 am
” But the reality is…etc etc”
You are looking at it the wrong way.
What matters is the amount on $ you are underwater by and if you did foreclose that you would be able to get a reasonable place to live.
November 5th, 2008 at 8:01 am
Glad the election is over. In the discussion as Barry has outlined above, consider this; I think we are about to see the greatest transfer of wealth in history. Since the government has assumed bad debt of gigantic proportion, that debt has been transferred through companies and institutions onto the government books. The government will pay that debt in some fashion, and that will come from us, through higher taxes, and in other ways.
Just think about it for a minute. We are massively increasing an already massive national debt. We lose no matter what. If we default, we lose. Higher interest rates, we lose. Much higher taxes, we lose.
Doesn’t really matter, either, whether you think deflation or inflation. This transfer of debt is a transfer of future wealth. Government becomes the grasshopper, we continue, ever longer, as the ants…
November 5th, 2008 at 9:10 am
Well, home prices never spiked here in Oklahoma. Still going up, as a matter of fact – we get gains of 2-5% in a year instead of 30%. So, I can’t say that “home prices are still too high” or anything else.
You are probably best off if you sold in a hot market in say 2005-2006 and moved to Oklahoma.
November 5th, 2008 at 9:25 am
Wellllll… If you’re underwater in California with a no-money-down ARM, why _not_ go into foreclosure after lining up a suitable apartment to rent?
November 5th, 2008 at 10:01 am
For many people Underwater does = foreclosure. I am an investor who regularly does short sales on homes in foreclosure. Most of these folks are underwater by only a few % and need to sell their house due to job change, sick mother, etc. They are living paycheck to paycheck and cannot afford to pay a realtor commission to sell their house and end up in foreclosure. If they only had a little equity (or savings) to pay the realtor commission they would be able to sell and avoid foreclosure. So in my personal experience having less than about 7% equity definitely leads many people to foreclosure.
November 5th, 2008 at 10:08 am
@ Doc:
“If you’re underwater in California with a no-money-down ARM, why _not_ go into foreclosure after lining up a suitable apartment to rent?”
Or worse yet:
If you’re underwater in CA with a zero down ARM… why not mail your keys to the bank and live for free for a couple of months??? Just squat til the bank kicks you out…
I’m afraid thats what the more irresponsible of the folks in that situation will do.
On a side note:
We had one foreclosure in our little neighborhood. It was boarded up and looked like shit for three months. Then all of a sudden, its cleaned up, and there is a Windermere sign out front, and its on the market for an average price for our area… so something must be working.
I’ve also been receiving some new credit offers in the mail recently, and those weirdo mortgage ads with the housemoms shakin booty are all over yahoo again… so something must be working.
November 5th, 2008 at 10:27 am
Barry, I don’t understand your logic here. You say:
“We sold a house for an big gain (100%) in 2006, and bought a home that is now a little underwater. But the reality is that the loss on the current home is about the same as it would have been on the prior house; had we not moved, we would have had that much less of a gain on the old house.”
Here’s my point: “much less of a gain on the old house” is not the same as a loss on the new house. Pretend when you’re writing this that you’re talking about stocks. I don’t think you would be trying to soften the blow this way.
Let’s say, for argument’s sake, you bought the old house in 1998 for $750,000 and you sold in 2006 for $1.5 million. If you had stayed in your old home, you wouldn’t have a loss at all, you’d still be up, say 80% from 1998.
I’m going to assume you bought a new home for $1.5 million (maybe you weren’t as foolish as many Americans). Now, you’re down 20% from what you paid in 2006.
Maybe I missed something. I’m not a quant, but I do know that folks don’t always see things clearly when it comes to their home.
~~~
BR: No, we traded up, but did not go crazy. And the house we passed on, has already fallen $500k in price.
Had we stayed where we were, we would have been in a less desirable house, and less attractive part of town; We are now 100 yards from the water, a block from a nature preserve and a block from a big waterfront park. So we paid for, and got, a big quality of life improvement for less than 20% price increase.
The real difference is the next house: If the current house drops 20%, but the house we want drops 20%, its big savings . . .
November 5th, 2008 at 11:01 am
Bruce in TN – I agree on the transfer of wealth.
I want to point out (and Sec Paulson exclaimed this too) that the damage is done the instant the debt is created without ability to repay. Someone gets stuck that moment. But the flip side of that statement is the fact – without the debt creation in the first place, nothing is happening.
So you’all put that in the pipe and smoke it in.
November 5th, 2008 at 11:09 am
Doc & I-Man:
Of course the likeliest course of action for those seeking to milk the situation for all its worth will be to stop making payments, pretend to cooperate with the lender to workout new payments terms (all the while making no payments) stall, stall, stall, and live free for a year or more before the county sheriff actually comes to physically evict you.
Near the bottom of the last housing downturn in California (~’96), it was taking lenders over a year to evict an ‘owner’ after they stopped making payments.
With this downturn being far worse, by the time the true housing bottom is reached (likely 2012) I’d be willing to bet that lag will eventually become 1-1/2 to 2 years.
November 5th, 2008 at 11:31 am
With Obama’s win, there’s an increased likelihood that judges will be given authority to alter the terms of the mortgage, in the event that the borrower declares bankruptcy. (Larry Summers approves of such an idea).
Under normal circumstances, I would be opposed to the idea. But in the current morass, it might just make sense to give such authority to judges for a limited period of time (e.g., until 2011).
November 5th, 2008 at 11:51 am
If you’re underwater in CA with a zero down ARM… why not mail your keys to the bank and live for free for a couple of months??? Just squat til the bank kicks you out…
I’m afraid thats what the more irresponsible of the folks in that situation will do.
Heck, mail back the keys and offer to ‘housesit’ until they can find a buyer.. Now THAT’S Chutzpah!
Can we please sterilise anyone who thought it was a good idea to offer no-down loans in non-recourse states? Anyone that blindingly stupid should not be polluting the gene pool…
November 5th, 2008 at 1:14 pm
the WSJ article cites a publication by Foote, Gerardi, and Willen. for those interested, the working paper is here: http://www.bos.frb.org/economic/ppdp/2008/ppdp0803.pdf
November 5th, 2008 at 3:03 pm
Underwater doesn’t equal forclosure if:
1) We have 10% or greater annual inflation (and we do regardless of the BLS make believe).
and
2) Your income keeps up with real inflation.
I’m doing fine. How about you?
November 5th, 2008 at 4:23 pm
Pool Shark,
I have a friend who bought an ocean view mansion in Laguna Niguel in 2005 for 1.6M. He hasn’t made a payment in almost 18 months.
And, they’re no closer to eviction than they were 1 year ago. I suspect they’ll be able to live there for another 6 months to a year. The bank just doesn’t want to take it back and each “short sale” offer delays the process another 4 months.
You could literally live indefinitely in a soon-to-be-foreclosed house. I have seen it.
Not bad to live in a 4000 sq ft place for free (except for electricity and gas). The place even has a smokin’ back yard and a spool (spa & pool). It’s a party place. Very nice.
Too bad I’m renting, or I’d think about doing it myself.
Chuck Ponzi
November 5th, 2008 at 8:19 pm
Bruce N Tennessee Says:
November 5th, 2008 at 8:01 am
Glad the election is over. In the discussion as Barry has outlined above, consider this; I think we are about to see the greatest transfer of wealth in history. Since the government has assumed bad debt of gigantic proportion, that debt has been transferred through companies and institutions onto the government books. The government will pay that debt in some fashion, and that will come from us, through higher taxes, and in other ways.
Just think about it for a minute. We are massively increasing an already massive national debt. We lose no matter what. If we default, we lose. Higher interest rates, we lose. Much higher taxes, we lose.
Doesn’t really matter, either, whether you think deflation or inflation. This transfer of debt is a transfer of future wealth. Government becomes the grasshopper, we continue, ever longer, as the ants…
Bruce,
you’re far too kind, one, you have to remember that the ‘ants’ had stores–in the story. Today? as if!~
+ you should, also, see the “Bailout” in its true light: “Takeover”..