The Homa Files

Ken’s Take:

1) The headline in the WSJ says “1 in 6 underwater”.  I’m more impressed that almost 85% of home owners owe less than their home is worth, and that almost 1/3 own their houses free and clear — with no mortgage balance at all.

2)  Though home prices have slid 13% in the past year or so, they’re up over 70% since 2000.  That’s not bad appreciation.

3) McCain went long-ball last nite with the mortgage buy-back proposal. Note that Congress enacted a “foundation” bill in July that provides a framework for doing so.

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Excerpted from WSJ: “Housing Pain Gauge: Nearly 1 in 6 Owners ‘Under Water’, October 8, 2008

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The majority of homeowners still have equity, and even among those who don’t, many continue to make their mortgage payments on time.

In contrast with the 12 million home borrowers estimated to be under water, 64 million have equity in their homes. These include 24 million households who own their homes free and clear, and 40 million whose homes remain worth more than is owed on them.

About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth.

The comparable figures were roughly 4% under water in 2006 and 6% last year, Among people who bought within the past five years, it’s worse: 29% are under water on their mortgages.

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The result of homeowners being “under water” is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.

And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home’s value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.  As home values slip, growing numbers of would-be borrowers lack sufficient equity to refinance. The falling values also make mortgage lending look riskier to banks, spurring them to tighten credit standards.

Even for folks with equity in their homes, some borrowers fret that declining prices and tighter lending standards could make it hard for them to tap their equity.

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Prices are back to 2003 levels in the San Diego and Boston metropolitan areas, and back to 2004 levels in Las Vegas, Los Angeles, San Francisco, Fort Lauderdale, Fla., and Minneapolis.

Among mortgages on one- to four-family homes, 9.16% were a month or more overdue or were in foreclosure in the second quarter.. That compared with 6.52% a year before and was the highest level since the association began such surveys 39 years ago.

Most mortgages in default were issued in 2006 and 2007, when lending standards were loosest and the housing market was peaking. Many who bought then made small down payments or none, so they had little equity in their homes from the start.

In July, Congress enacted legislation designed to help borrowers who owe more than their homes are worth by allowing them to refinance into a government-backed loan, provided their mortgage company forgives part of their principal. It’s not clear how many borrowers the program will help, because before reducing the principal, lenders would almost always try first to freeze or reduce borrowers’ interest rate to make payments more affordable.

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How much pain homeowners feel varies greatly from place to place. The most severe drops in home values are in parts of California, Florida, Nevada, Arizona and other areas where speculation pushed prices up and builders far overestimated demand.

On a national basis, home prices peaked in mid-2006 after rising 86% since January 2000, according to the First American index. Since peaking, that index has fallen 13%.

The declines have made homes more affordable, bringing prices in many areas closer to their long-term relationship to incomes. In the second quarter, the median home price of about $203,000 was 1.9 times average pretax household income. That was close to 1.87 times income for 1985 through 2000, prior to the housing boom.

http://online.wsj.com/article/SB122341352084512611.html

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This entry was posted on October 9, 2008 at 7:30 am and is filed under Government & Politics, Mortgage Crisis. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.