How upside-down is L.A.?

The latest home value estimates from Zillow contain an interesting set of numbers on Los Angeles area homes underwater -- that is, more is owed on the mortgages than the houses are worth.

Only about 1% of L.A-area homes purchased in 2003 have negative equity, Zillow reports. But a bell curve emerges, with 24% of homes purchased in 2004 now under water. The peak year for home purchases that are now in negative equity was 2006 -- 71% of homes purchased then are now upside down. About 56% of homes purchased in 2007 are in negative equity.

The negative equity percentage falls to 13% in 2008, tied to the sharp drop in home prices. Buyers are now making median downpayments of 20% of the home purchase price, Zillow reports, up from a 10% median downpayment in 2007 and a 5% median down payment in 2006 (not surprisingly, the year resulting in the highest percentage of homes now upside down).

Currently about 40% of Los Angeles-area homes purchased in the last five years are in negative equity, Zillow said.

-- Peter Y. Hong

Comments

[Rational Renter]

That 40% will undoubtedly increase as prices continue to fall. And how long will it take for homes to hit bottom and then rebound sufficiently to get these people back above water? During the last bubble, if you bought a house in 1991, you couldn't sell it for that same price until 1999. So you'd have to be a real optimist to think prices will hit 2007 levels again before a decade has passed. Anyone in that 40% who has an ARM will be unable to refinance when their rates reset and will probably foreclose.

This mess feeds itself.

[Cal]

The link needs fixing. Great charts on the Zillow site.

Off topic:
http://tinyurl.com/5g28sb

The great white hope of foreign buyers rushing in to buy property en masse is proving to be just another REALTOR® pipe dream.

I wonder what the next great white hope will be. First it was that prices wouldnt fall, then it was that pent-up demand would be released, then it was HOPE NOW would stop the tide of foreclosures, then it was conforming jumbos would release even more pent up demand, and somewhere in there was that foreigners would rush in and snatch up all the property.

Next batter on deck?

Do agents even realize that both fannie & freddie have announced that they will slow mortgage purchases? That the conforming limit is going DOWN? That DPAs are being eliminated?

DQ should report soon that July was the best month of the year so far (based on the data i'm seeing) but it should be the second worst July on record. The credit crunch started in earnest in July last year and those low sales levels should never be hit again barring an absolute crisis. But even with big price drops sales are at historic lows. People looking at the data in historic context will see how far prices have fallen and how bad sales are.. but I think the RE industry will be declaring a bottom. If they want to declare a bottom in sales, I wouldn't disagree with them, but they will be spinning that to mean price stability is near or at hand and that is clearly just a fantasy.

It is only because we have the buyers who shop Macy's 15% off "sales" who think the current market is a "deal" that we have any sort of volume at all. The bifurcation continues with the banks being the real volume and the existing home owners hurting. I'd guess foreclosures are running around a 1-2 months supply and existing sellers running around a 8-9 months supply. The blend will be around a 6 month supply but that hides who is really pulling the majority of money out of the market. The banks are soaking up capital and as capital becomes in shorter supply that will be even more significant.

[Natal property]

Hi

I think mortgage is totally depend on the price of house and bank are given by mortgage.They have some rules on this.
1. pledge your own property.
2. 25% equity
3. 70 % of house price is given by the bank.

[anon]

Can Zillow's numbers be believed? Would rather hear from Sean O'Toole at Foreclosureradar.com.

Given that so many folks borrowed on their homes, that 1 percent number on 2003 purchases doesn't sound right.

[richinar]

I am betting that the info represented here does not include HELOC data. If you added that into the mix you would find significantly more owners are underwater.

[The original RZ]

This adds more fuel to the "prices have been and are too high" fire. We've heard blame being laid on lenders and buyers, but I wonder, what about the appraisers? What role did they have in having the prices skyrocket between 2002 and 2007?

[Eric Toya - LWM Blog]

I don't have data to the contrary, but I find it hard to believe that the median down payment in 2008 has been 20%. That means that half of all buyers put down MORE than 20%

This makes me wonder if this only tracks the 1st mortgage. If that is the case, any additional borrowing that becomes part of the down payment then would not be factored in the negative equity numbers.

[Nick]

These numbers seem pretty close to me, for what it's worth. With prices down to ~2004 levels, you'd expect that few 2003 borrowers are underwater yet based on the initial loans, zillow probably can't accurately track HELOC's, and you'd expect there weren't too many refi's between 2003 and now (probably mostly sales instead, people trading up). These are also people underwater but not yet foreclosed on; most of the early loan failures (subprime, etc.) are probably already REO's by now.

The problem, as Renter pointed out, is how much the bars are going to increase when prices fall another 20% or more. Now that would be an interesting chart to see...

[Rob]

Cal wrote: "The great white hope of foreign buyers rushing in to buy property en masse is proving to be just another REALTOR® pipe dream"

Very interesting read, thanks. I saw this contradicting post from Patrick.net
http://tinyurl.com/5t7hzq

[Wooster]

Zillow? While your analysis may hold water I have to discount it because you use Zillow for anything other than quick entertainment on the internets. It's not a reliable source for anything.

[Laker]

The 2003 vintage is a lot worse than what they are saying...1%...
There are tons of seconds and HELOCS on these houses done in 2004,2005, 2006. The first mortgage is a 2003 vintage caring probably 5% APR. Many of these HELOCS are ARM based, and will adjust. There will be a new phenomenon of 2nds and HELOCS foreclosing, especially on 2003, 2002 purchased houses. These can still fetch 20-50 cents on the dollar for the HELOCS.
That step is inevitable, and will provide a force to pull back houses prices below 2003 price support level. I believe that once prices reach 2002 levels, the over correction will start and rents will actually be same or higher than 30 year mortgages.
Before all the specuvestors will jump in, they will realize the huge amount of rentals, and vacancy rates that will actually pull rents down. So instead of rents providing a floor, they will collapse together with house prices down to 2000-2001 price levels.

Additionally, there is no bell shape for being underwater. Buyers in 2007, and possible 2008 even with 20% down, will be guaranteed under water for 5-8 years.
I think the zillow report only considers 1st mortgages in determining the equity. They assume 20% second mortgage as a down payment.....

[Ace]

I'm not suprised to see the median down payment jump to 20 percent this year. Almost every transaction that I have seen has at least 20 percent down. It is nearly impossible to get a second mortgage when buying a house today.

[Robert in Palm Springs]

Whether these numbers are exactly correct or not is irrelevant. We all know that almost anyone who bought in the past three years is likely under water, especially those with little or no down payment.

The ramifications are such that these people are not only likely candidates to default on their loans (further depressing the housing market), but they are also likely to default on their other debt and have no money for buying consumer goods, much less saving anything.

Since we are still a consumer-based economy, there can be no recovery until the consumer is empowered to buy again and/or we move back towards a production society. Neither will happen over night.

Housing prices have nowhere to go but down. We are clearly in an asset deflationary mode. Commodities are now starting to drop in price and equities will soon follow. We are years away from a bottom, much less a recovery.
Those with cash will be able to negotiate prices they never imagined they would see again.

[Cal]

Rob,

Thanks for the article, I was referencing individuals sitting over in foreign countries just waiting to buy American property. It turns out they are in no rush to come over and lose money either.

Sovereign funds waiting to snatch up bulk REO deals is something else entirerly. The article didn't go into what they were trying to do, buy at wholesale and resell at slightly under market or buy and hold (rent). One model I can see working (buy and sell) the other has a lot of long term costs that would really (imh) drag down returns. There are many funds already waiting for the bulk REO market to open up, so far it hasn't. There are a lot of funds waiting for people to start dumping mortgage notes as well (people like PENNYMAC). That foreign money wants to get into the action isn't a surprise.

[NewtoLA]

That means that half of all buyers put down MORE than 20%

I don't think this is the right definition of median. It means that as many observations are above the middle value as below. There could be a ton of 20 percent buyers and a few 10 percent and 20+percent buyers. Also, I know people that bought their places before the bubble, sold during or after the bubble, and used their profit as a down payment. This could account for the 20+ down payment folks today. They're cashing out and moving up.