Waterworld: 12 million American households are under water

News item, from the Wall Street Journal: "The relentless   slide in home prices has left nearly one in six U.S. homeowners owing more on a mortgage than the home is worth, raising the possibility of a rise in defaults -- the very misfortune that touched off the credit crisis last year."

Owing more than your home is worth is known as being "under water" or "upside down."

More:

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, according to Moody's Economy.com.

The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm's chief economist, Mark Zandi, who adds that "it is very possible that there will ultimately be more homeowners under water in this period than any time in our history."

The Journal reports that 39.9% of people who bought a home in Los Angeles in the past five years are under water.

Zillow, for what it's worth, reports that, on average, those 12 million people who are under water owe about $58,000 more than their home is worth. That adds up to $676 billion of "negative equity," Zillow reports.

And that raises a question that Zillow's top numbers cruncher, Stan Humphries, poses: If there is $676 billion in negative equity out there, how can John McCain's mortgage purchasing plan cost only $300 billion? Humphries adds, regarding the McCain plan:

• It benefits those homeowners who assumed the most debt closest to the height of the real estate bubble.
• It could create an incentive for more homeowners to default since they could then qualify for a reduced mortgage versus having to continue paying on an underwater mortgage.
• It places the full burden of relief on taxpayers, but taxpayers get no potential upside.

Your thoughts? Comments? E-mail story tips to Peter Viles

Photo: Flooding in Galveston, Texas, from Hurricane Ike, from Getty Images

Comments

[Mucker]

RZ in real finance before you were a credit cruncher people were obligated to put 20% down on cars so that they wouldn't be in the bucket as it's called. And of course that was the reality with houses as well. Bankers wanted the buyer to have a vested interest in order to avoid what we see today. If those people had been required to buy under sound financial practices they'd not have this crash to complain about.

[ry]

As I type this, I'm watching the European stock markets down about 5-7%, after the decline in Asian stock markets of about 5-10% on Friday.

Forgive my ignorance of the workings of the financial markets, but it's hard to believe that all this market turmoil is the result of the sub-prime mortgage collapse here in the U.S. I must be missing something else that's important. I knew that the real estate market was frothy when I was looking for a house in 2004-2005 and couldn't find a place that was affordable that my wife and I liked, but who would've thunk that it would cause a collapse in the global stock markets like this when the bubble popped!

Maybe there were just too many entities around the world willing to loan out money to anyone and the only ones that were willing to take the loans were the gullible / ignorant American homebuyers? Or is that statement too USA-centric? Are there other asset bubbles in the world that are also popping, or has the US mortgage debt permeated the world financial system to such a degree as to cause this kind of reaction?

[dclogang]

so if the government buys everything and then decides to sell to another country does this mean I'll have to pledge my allegiance to some other flag? France would be ok as long as we get discount trips to Paris and I could stay as long as I want. : - )

[TC]

I am sure I am under water just a tad, but the good news is my 401k is down 50% too!!!

I picked such a great time in American history to play grownup.

[G]

TC - Right there with you. :-(

[Dory]

The craziest thing about this data is that (at first blush) it is only talking about FIRST mortgages. How many HELOCS are piggybacked to those firsts? The banks in southern CA did huge business selling lines of credit attached to those firsts and even people who bought in the 70s - 90s took advantage of their home "ATM". Look around at your neighbors, how many of them couldn't clear 100K if their lives depended on it, and yet were putting in pools and spas and remodeling and taking huge vacations to God knows where on that rapidly evaporating equity?! I'm sure the number is well, well above 12 million who are upside down. Get real - money was sooo cheap during the boom, and people who had no business tapping home equity lines did so in DROVES.

This thing is going to get far worse before it gets better.

[The Original RZ]

Mucker - agreed!

[yingyang]

The Dow is s(t)inking for another day. We pay for the bailout and the stocks still fall. Boy don't we feel stupid. Can the politicians and wall street fatcats figure any other way to fleece America?

[It All Happens on the Margin]

Can the politicians and wall street fatcats figure any other way to fleece America?

Posted by: yingyang | October 10, 2008 at 09:12 AM

Which politicians and wall street fatcats get rich when the market takes a dump like this ?

[TC]

ry,

The housing bubble is/was only one aspect of a global credit bubble and ends up playing a small part. Some genius some place figured out how to get around a world standard of rating securities that backed these loans, but the loans went to credit of all types.

Perhaps the Housing Bubble was the catalyst, but I really do not know for sure. Again it's only one aspect of the credit bubble. Basically when it was time to see the assets, there were none. It was a sort of legal fraud that went global.

The housing bubble bet on prices continually climbing, which is a poor bet if you simply look at income to home price ratios. 3 is a safe ratio, 6 is not. They bet 6's across the board and it failed once the sub primes started to fail. I still feel there is alot of downward pressure that still exists, which may cause some traditional safe loans to fail as people go upside down, lose their incomes, and cannot sell their homes.

Someone please elaborate I know that my picture of this is limited.

[Lou]

If you're underwater and can still afford your mortgage then it's not a big deal.

If you're underwater and got one of these stupid interest-only or ARM loans with 100% financing. Boo hoo! Cry me a river Sally. You made your bed.

[DAve]

I BELIEVE that the most important idea behind Mc Cain’s refi program is that it makes these loans (most of which are not right now) into RECOURSE loans… which therefore would tend to stabilize the housing market as people wouldn’t be so highly motivated to walk away, an action which now we keep hearing over and over just makes “business sense” but puts all the rest of us in utter peril.
I know I choked when I heard him introduce this idea too but now I’m seeing that there could be important advantages that aren’t readily apparent.
As I’ve heard it said before just ‘cuz someone starts a fire in his room you don’t let the whole house burn down to teach him a lesson.
Even if we HAVE paid all of our bills on time and live within our means we can’t use that as an excuse when we’ve allowed our spouse to run up hundreds of thousands of dollars of debts through gambling and reckless spending just because we were too busy to monitor and regulate THEIR behavior as well as our own. That’s just an obligation of being in a situation TOGETHER.
If we had been more vigilant about what our government and our neighbors were doing we wouldn’t be in this mess.
And you probably don’t like hearing it anymore than I like writing it-

[Laker]

Mucker writes: .... If those people had been required to buy under sound financial practices they'd not have this crash to complain about.

Mucker,
Then houses in 2007 would still cost about 1998 price plus 3% inflation per year...Of course there would not be a crash. Our whole economy was based on a bubble that started around 1997. Everything was bubbled including the stock market, housing, commodities, etc.

[Gary Noel]

I at first believed that real estate was the cause of the financial crisis. How I realize I was wrong. The Fed has already pumped $1trillion into the economy. Paulson has spent almost $400 billion with $700 billion more to come. But all of the underwater mortgages would take only $670 billion to float????? I now have to look elsewhere else for someone to blame for the financial meltdown. Anybody have and suggestions?

[shockg]

"Why is there such a focus on "negative equity"? Everyone who buys a new car loses 40% of the value of that car the second they drive it off the lot, yet we never hear complaints on how they now owe more than their car is worth. "

It's very simple. This is a speculators blog and a home is viewed as nothing more than a short term investment. You know...an potential ATM machine.