Half of homeowners headed for deep trouble

The percentage of U.S. homeowners who owe more than their house is worth will nearly double to 48 percent in 2011 from 26 percent at the end of March, portending another blow to the housing market, Deutsche Bank said on Wednesday.

Home price declines will have their biggest impact on prime "conforming" loans that meet underwriting and size guidelines of Fannie Mae and Freddie Mac, the bank said in a report. Prime conforming loans make up two-thirds of mortgages, and are typically less risky because of stringent requirements.

"We project the next phase of the housing decline will have a far greater impact on prime borrowers," Deutsche analysts Karen Weaver and Ying Shen said in the report.

Of prime conforming loans, 41 percent will be "underwater" by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties’ value, up from 29 percent, it said.

"The impact of this is significant given that these markets have the largest share of the total mortgage market outstanding," the analysts said. Prime jumbo loans make up 13 percent of the total market.

Deutsche’s dire assessment comes amid a bolt of evidence in recent months that point to stabilization in the U.S. housing market after three years of price drops. This week, the National Association of Realtors said pending home sales rose for a fifth straight month in June. A widely watched index released in July showed home prices in May rose for the first time since 2006.

Covering 100 U.S. metropolitan areas, Deutsche Bank in June forecast home prices would fall 14 percent through the first quarter of 2011, for a total drop of 41.7 percent.

The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.

Homeowners with the riskiest mortgages taken out during the housing boom have seen the greatest erosion in equity, in part because they were "affordability products" originated at the housing peak, Deutsche said. They include subprime loans, of which 69 percent will be underwater in 2011, up from 50 percent in March, Deutsche said,

Of option adjustable-rate mortgages — which cut payments by allowing principal balances to rise — 89 percent will be underwater in 2011, up from 77 percent, the report said.

Regions suffering the worst negative equity are areas in California, Florida, Arizona, Nevada, Ohio, Michigan, Illinois, Wisconsin, Massachusetts and West Virginia. Las Vegas and parts of Florida and California will see 90 percent or more of their loans underwater by 2011, it added.

"For many, the home has morphed from piggy bank to albatross," the analysts said.


  1. woody188

    My wife and I were looking to move just South of where we are now but after reading this article yesterday I figure we can save a bundle if we just hold out another year or two.

    As an example, there are 2 houses up for sale that are identical and only a few houses apart. One is a run down foreclosure listed at $80,000. The other has been fixed up with newer kitchen and so forth, but they are asking $144,000. That’s a huge difference. I could dump $20,000 into the $80,000 home and bring up to the same level as the one listed at $144,000.

    So it’s a buyers market, and waiting for the right deal is going to be the name of the game.

    R U Main Core?

  2. oceanika

    It’s interesting that the word “home” is used when talking about the real estate fiasco. When residential real estate becomes a commodity, something to trade-in and speculate-in, “home” becomes incidental.

    Price is often confused for value. The value of a home is in its utility to house the occupant, the quality of life and the security ownership affords.

    When the price of a house rises without adding value (i.e. property improvemnt or community improvements such as roads, nearby parks, utilities…) that is called inflation. The value doesn’t change, your money is merely worth less.

    Home ownership has been a hedge against inflation, but only when it’s sold. When “owners” treat it like an ATM and keep borrowing against the inflated market price – well, this is what happens.

    Flip, flip, flip…eventually someone is left holding the bag. Unfortunately, most won’t learn this lesson; abetted by the mortgage lenders and the real estate industry, the cycle will start again.

  3. gazelle1929

    Other than the fact that being upside down or underwater makes it almost impossible to sell a house, why does that state mean trouble for those who continue to make their mortgage payments on time?

    I went through such a period in the mid-West some years back, but I was living in the house and wanted to keep it so I made the mortgage payments and eventually the housing market went back up and I was able to sell at a considerable profit when I was ready to move on.

  4. griff

    Exactly. I owe more than my house is currently valued but I’m paying it nonetheless. In fact I pay down as much as I can every month in extra principle. That’s because my wife and I still have our jobs.

    My only regret is not having a crystal ball. I built five years ago when the bubble was was fully inflated. We’re buried in debt but are thankfully able to pay our bills, so we’ll crawl out eventually.

    I don’t seek a quick fix or government assistance. I took on the debt and take full responsibility for it. What gets lost in all this is the fact people are in trouble because they’re losing their jobs.

  5. bogofree

    This article is nothing more than a project of what COULD happen by 2011. They are correct if the housing market keeps its current trend. But will it? The last several months have shown some positive gains in the housing sector and this has as much of a chance of continuing as Deutche Bank projections of going the other way.

  6. pondering_it_all

    This would only be a problem if those prime loan holders needed to sell their house. Otherwise, it makes no difference whatsoever: Their payments are still what they were when they bought the house or refinanced. As long as they can keep making those same payments, they are fine.

    Remember: Prime loans don’t have any of those nasty trap-door features like balloon payments, escalating rates, etc. that only made sense if prices went up forever.

    All of us who bought only as much house as we could afford, with a conventional fixed rate loan and down payment are doing just fine, thank you!