More Than 8 Million U.S. Mortgage Holders Are Under Water as Prices Tumble

[Purveyor]

Source: Bloomberg

By Dan Levy

March 4 (Bloomberg) -- More than 8.3 million U.S. mortgage holders owed more on their loans in the fourth quarter than their property was worth as the recession cut home values by $2.4 trillion last year, First American CoreLogic said.

An additional 2.2 million borrowers will be underwater if home prices decline another 5 percent, First American, a Santa Ana, California-based seller of mortgage and economic data, said in a report today. Households with negative equity or near it account for a quarter of all mortgage holders.

“We have way too much supply and not enough demand,” Sam Khater, senior economist for First American, said in an interview. “People aren’t going to purchase a home as long as prices keep falling, and someone who is worried about their job isn’t going to purchase a home either.”

Prices in 20 U.S. cities fell 18.5 percent in December from a year earlier, the fastest drop on record, according to the S&P/Case-Shiller index. Sales of previously owned homes, which account for about 90 percent of the market, fell in January to the lowest since 1997, and new-home purchases plunged to the lowest since records began in 1963, the National Association of Realtors and Commerce Department said.

The total value of residential properties in the U.S. fell to $19.1 trillion by the end of 2008, down from $21.5 trillion a year earlier, First American said. California lost more than $1.2 trillion in value last year, accounting for roughly half of the national decline in housing values.

Read more: http://www.bloomberg.com/apps/news?pid=20601087&refer=home&sid=aTX3K2Tvs5cs

[Lost in CT]

1. They need to drop quite a bit more in some areas...

California and Florida both still could use a healthy 30% drop... and my neighborhood the average starter home price is still above seven figures.

[remember2000forever]

2. Why should you be able to buy a home 50% below

the replacement cost? "How low will you go" is being driven by the media and IMO, greedy bottom feeder investors.
This recent 30% mindset is being spouted after T.V. Realtor "Experts" put a number on it.
I'm speaking about FLA. I don't know the Ca. Market.

[Lost in CT]

4. I can buy a used car at 80% less than the replacement cost....

These are older homes many built in the seventies or before...

They have doubled in price in the last 5 years they need to go back to reality.

A median house price should not be out of reach from a median wage earner.

[hugo_from_TN]

5. I agree. They are still too high and need to keep dropping to more historical levels.

[David__77]

6. Because market forces will dictate it.

People cannot afford the current prices, and the rent/mortgage relationship is all askew now. Basic economic factors like income, population density, etc., will determine the housing prices in the long run, along with the replacement costs ultimately.

[AnneD]

11. It is a buyers market.....

and buyer's set the price NOT the sell. If they were correctly priced-we wouldn't have the problem we do today.

I refused to go out of my price range on area housing. Hubby and I have a combined income of 80-89K. I am a Nurse and he is security. We looked for a house that was no more than 1/3 our take home and guess what-they are no where near us. It turned out to be a blessing-we didn't get caught in this mess. We would love a house, but not til it is something we can afford. So they will have to build more reasonable housing or it will have to come down more.

That is the cold hard reality.

[FarCenter]

12. There are about 5 million more homes vacant than normal

So there is no demand for new construction. Hence, replacement cost is not relevant.

[slackmaster]

3. Mine in San Diego is still worth well over twice what I paid in 1994

Prices could and should come down some more.

[David__77]

7. People don't seem to realize how much prices ballooned.

They are thinking, "it already came down a lot, so it will stabilize." But there's little basis for that now that the air has come out of the balloon. In Sacramento, where I live, prices tripled! 200% increase in a relatively short time. Nothing changed in the basic economic conditions to warrant this. So prices have come down by more than 40%. But another 30% drop, relative to current prices, would restore the historical price level range.

[CrispyQ]

9. Our house is 3 times what we paid for it in 1988 .

'88 - for those who don't remember, let me remind you - the S&L scandal. Housing plummeted. We lost a very nice house before we picked this one up fairly cheap. I feel badly for anyone going through foreclosure.

My sister & her husband bought their house in 2000. It went up about 30K fairly quickly & is now about what they paid for it. My hope is that they didn't refinance while it was up, but she likes the lifestyle - vacations, furniture, big SUVs, eating out. On the other hand, I believe she may have come into some money from her father's side of the family, so maybe with the economy the way it is they will spend any extra money more wisely - or better yet, save it! ~crosses fingers

We were always very different that way. Her piggy bank was always empty. Mine was full. Plus I had jars of change stashed in my room. ;)

[slackmaster]

10. You don't have to remind me of the S&L scandal

Between my then-wife and me, we lost five jobs over the course of two years in that train wreck.

Having both members of a couple work in the same industry is risky.

[Xithras]

8. The "Three Year Rule" is already kicking in inside some markets. Bottoms are being found.

Here in the San Joaquin Valley, we've taken some of the hardest hits in the nation with price drops of up to 75% in some isolated areas, and a more generalized price drop of about 60%. There are a few towns that have seen foreclosure rates up to 20%. Still, the market is hitting bottom, leveling out, and even CLIMBING again in a few towns and neighborhoods.

The traditional benchmark of home affordability has always been "A home should cost no more than 3-3.5 times your annual income." That price benchmark has been the norm since the 1800's and generally seems to be where prices stabilize.

Here in the northern SJV, where I live, the median household income is $47,000 a year. The median price for a home is now $155,000 a year, which is exactly where it SHOULD be. At the peak, that median price was pushing $400,000.

Some analysts are saying that prices may temporarily drop a little further because of the glut of foreclosed homes still on the market, but that they will end up normalizing right around where they are today. Home prices are already flattening out in response, and sales are picking up.

[David__77]

13. That is a slightly misleading picture.

The market is disproportionately filled with lesser quality homes in San Joaquin. The price is "artificially" low due to this. Comparable homes are still priced at much more than they were, adjusted for inflation, during the 1990's. There is still room to drop, and furthermore, overcorrection is almost a certainty given the deep recession we are only recently entering. I would not be surprised if prices drop somewhat more.

[Xithras]

14. The prices of the 1990's aren't relevant to todays prices.

The population in the SJV has grown by about a million people over the past decade and new housing developments have BOTH 1) Not completely kept pace with local population growth 2) Been disproportionately skewed toward higher income earners and commuters. There's a longstanding pent-up demand created by native population growth for homes affordable at local wages that has been largely ignored over the past decade. Also, adjusting for inflation is an insufficient benchmark since the SJV has undergone extensive changes to its local economy over the past 15 years leading to an increase in per capita income that has outpaced inflation (in real terms, that means local wages have gone from "Abysmal" to merely "Poor").

This means that relative demand for locally affordable homes is actually higher today than it was in the 1990's, and that the local population has more income (even adjusted for inflation) to purchase with. The natural result of these factors is simple...even without the bubble and artificial price inflation, home prices in the SJV would have outpaced inflation over the last decade anyway. Just as they did during PREVIOUS decades...home prices in the SJV have been outpacing inflation since the early 1980's simply because the starting prices were so low and the region is in proximity to major urban areas. In 1978, my dad bought a 1/4 acre piece of property with a new 4br home on it near Modesto for $22,000. Adjusted for inflation, it should be worth about $70,000 today. Based on actual market conditions, the house is still worth about double that even []in current market conditions. Why? Because the median wage in the Central Valley was only about $12,000 a year in the late 1970's...it was not only one of the poorest regions in the state, it was often compared to Appalachia and was one of the poorest in the nation. As local wages have grown, so has buying power and home prices.

Home price projections that don't factor in regional economic shifts are useless.

[David__77]

15. So then...

The price of the property you mentioned was about 183% of the median wage in the late 70's. If it is priced at $140,000 now, that would imply a corresponding median income of over $76,000, presuming the relation between median income and price remained the same. Of course, median income is much lower than that now. The differential can be partly explained by varying interest rates and population density, but I believe there is still price inflation that is not linked to any fundamental economic change in the region. I certainly have thought of the points you raise. In any event, it's interesting armchair speculation on all our part. A couple years ago, few believed that the prices would go down as much as they have. We'll see what happens.

[xchrom]

16. recommend. between job losses, this, the economic wreckage overseas --

the whole picture just isn't good.