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« Introducing Wolfgang Amadeus Papandreou | Main | CHART OF THE DAY - The Scariest Jobs Chart Ever »

REPORT - Over 50% Of U.S. Homeowners Are Underwater

New report shows the housing outlook is getting worse.


By CNBC's Diana Olick

Reprinted with permission.

A new report on still falling home prices today highlights the fact that the lower those prices go, the more American borrowers fall into an negative equity position; that is, they owe more on their mortgages than their homes are worth.

Many of those borrowers are already behind on their mortgage payments, and some are likely already in the foreclosure process. The rest of them are in danger of defaulting, not because they can't pay their mortgages, but because they either won't want to (seeing as they will never see any real appreciation in their investment) or because any change in their economic or personal situation might force them into default (change of job, divorce).

While 14.6 million might seem like a lot, it's not the real number when you consider negative equity in housing's recovery. That's because it doesn't factor in "effective" negative equity, which is borrowers who have so little equity in their homes that they cannot afford to move.

Consider the following from mortgage analyst Mark Hanson:

On US totals, if you figure average house prices use conforming loan balances, then a repeat buyer has to have roughly 10 percent down to buy in addition to the 6 percent Realtor fee to sell. Thus, the effective negative equity target would be 85%. You also have to factor in secondary financing, which most measures leave out.

Based on that, over 50 percent of all mortgaged households in the US are effectively underwater — unable to sell for enough to pay a Realtor and put a down payment on a new purchase without coming out of pocket. Because repeat buyers have always carried the market as the foundation, this is why demand has not come back. It's as if half the potential buyers in America died over a two-year period of time.

The foreclosure crisis grabs most of the media attention these days, but in order for housing to recover, the market needs to see activity.

It's as simple as buying and selling. Negative and effective negative equity are causing stagnation, which may in the end be far more detrimental than foreclosures. The argument to solve this problem is principal forgiveness, and it is gaining traction politically and somewhat less in the banking sector.

Principal forgiveness, or lowering the balance of a large chunk of the nation's mortgages, would be costly at best but could be catastrophic at worst.

  • "Those thinking principal reductions are a panacea have never originated a loan, done the street level research, and do not really know the borrowers behind their data," argues Hanson. "More than likely it would create a far greater number of new strategic defaulters than the number it would legitimately save from foreclosure."


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Reader Comments (12)

"Effectively" underwater, but, yeah. And it's not going to get better any. time. soon...
Nov 9, 2011 at 1:10 AM | Unregistered CommenterDon Smith
All that $hit sits in at least one book at face value. Where exactly does the can-kicking road end?

A house got auctioned off yesterday based on the Assignment of Mortgage below. See if you can find how many material elements are wrong with it.

MERS, GMAC, ORLANS MORAN, How's that for a combo? (PDF Assignment at link)


If the auction sale did take place (not sure yet) and a foreclosure deed is recorded you can bet your bippy somebody's ass is getting sued.
Nov 9, 2011 at 8:10 AM | Unregistered Commenterchunga
Don't look for anything to improve. The banksters want to foreclose on America. They want everyone(but them) to go tits up. We can then be tennants on the global plantation. Folks have a hard time wrapping their heads around just how evil these people are. They won't stop....on their own.
Nov 9, 2011 at 12:43 PM | Unregistered Commenterrobertsgt40
November 2011 is the end of a natural cycle of the money-debt-asset macroeconomic system. Before the 1913 Federal Reserve which was a product of the wealthy 0.0001 Percent Elite, there were about an equal number of positive GDP and negative GDP years for the United States.

The Federal Reserve congealed a political-Wall-Street-London-wealthy elite collaboration whereby the monetary system was transformed to create wealth for the Elite against the debt and labor of the masses. The debt-money-asset system was leveraged ever upward and as long as inflation withered the debt burden, the system looked fair to the masses. What did matter that interest was being paid on fabricated on the books money and the wealthy were making money from nothing more than spurious fraudulent bookkeeping - if inflation of citizen held assets forever reduced the burden of debt.

But there are very quantitative limits to the debt-money-asset system. Ultimately excessive supply, over valuation, and consumer saturation with both the available supply and debt will result in natural time based cyclical corrections.

The collaboration of the Federal Reserve, other central banks, Wall Street, London, the real .001 percent Elite, and both and all political parties owned by the counter parties have created the system's rules which have favored leverage, derivative speculation over saving, and asset bubbles which have enserfed the 50 percent of underwater residential owners. These rules create the time based asset, including debt as an asset, valuation curves.

When the macroeconomic system collapses this November in a very patterned very predictable nonlinear manner, possession of fixed assets and mortgages which have been so skewed by the 1913 Collaborative's rules, will create conditions that likely will be unbearable and untenable by those recipients of the aptly called predatory lenders.

The debt-money-asset system has and will be understood and recognized to have the patterned properties of a science akin to physics.....
Nov 9, 2011 at 8:16 PM | Unregistered Commenterhttp://www.economicfractalist.com/
In order to bring prices to stabilize: Banks must sell homes at foreclosure sale at whatever price.is best not be able to take back. Change the bankrupcy code to allow people to retain home at current market value.
Nov 12, 2011 at 10:09 AM | Unregistered CommenterBW
Personally monetize gold ..... add to liquidity (debt free) ........ purge old fiat debt out of the system and back to its "nothingness"
Don't let idiots head fake you out of your jock-strap about Gresham's law, either. Gresham's law was predicated on FIXED bullion values, not floating (increased) bullion values. In goes the good .... out goes the bad.
Nov 12, 2011 at 1:26 PM | Unregistered Commentertherooster
Principal reduction...great idea! My mortgage is current, but I'd love a reduction as I'm under water and will stop paying at any hint of this passing!!
Nov 12, 2011 at 5:04 PM | Unregistered CommenterJ
Principle Reduction huh....

Sounds like once again us people who bought a home we could afford and have made our mortgage payments on time get screwed. Who wants to bet that if a plan like this is enacted, the ones receiving reductions will be the parasite class who should never have been allowed to get a loan in the first place?
Nov 14, 2011 at 12:48 PM | Unregistered CommenterRick
Nov 14, 2011 at 9:31 PM | Unregistered CommenterJeff
It sure seems like the banks are going all-in on the no-writedowns AND no-revolts ticket.

I'd stay away from that combo as a gambling man.
Nov 14, 2011 at 10:16 PM | Unregistered CommenterCheyenne
A lot of grief could be solved by allowing most of these loans to be assumable. This would allow many to be freed up to move out of a home they can no longer afford and let someone buy without a down payment.
Nov 15, 2011 at 10:47 AM | Unregistered Commenterscoodydootoo
"Over 50% Of U.S. Homeowners Are Underwater" is incorrect. Should be "Over 50% Of U.S. Homeowners With a Mortgage Are Underwater". Significant difference.
Nov 17, 2011 at 8:52 PM | Unregistered CommenterDavid

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