Underwater Homes Remain a Dark Spot in the Recovery
Business + Economy

Underwater Homes Remain a Dark Spot in the Recovery

iStockphoto/The Fiscal Times

When Sally Herigstad and her husband wanted to buy a house recently in their Seattle suburb, they ran into some unfriendly numbers. They owe the bank about $360,000 on their existing home, but a sale would bring in only the low to mid-$300’s:  they’d have to close the deal with a big check. So the couple went ahead and bought the house they wanted--and then rented the first. Still, Sally finds being a landlord a hassle. “If I could sell it and get my money out, I’d do it today,” she says of the first home.

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Realtor Ryan Halset says he’s seeing a lot of real estate looping  in Seattle—since 2008, his company has been selling a growing number of second homes to people who’ve opted to rent out instead of sell their first, often because it’s underwater. “There’s a sense among homeowners that if they can simply hold onto their property for 4 to 5 years, they’ll recapture the equity they had prior to the housing collapse,” he says. That’s turned greater Seattle into a seller’s market—the number of listings has dropped 46 percent year-over-year since this time last year, he says. Home values in Seattle proper jumped almost 13 percent in 2012, according to figures from real estate data provider Zillow.

The number of people with troubled loans is affecting the market nationally too. For all of the good news about 2012’s home price rise, it hasn’t made a serious dent in the number of underwater homes, according to the latest figures from data and analysis firm CoreLogic. Between the third quarters of 2011 and 2012 (the latest data available), the percentage of owners with loans who owe the bank more than their house is worth fell only from 22.1 to 22.0 percent.

That’s taking out a chunk of the inventory of homes on the market as would-be sellers hold on, waiting for rising prices to turn their mortgages around. And while home prices are rising, only 17 percent of those currently underwater will escape negative equity over the next year if prices continue to grow, CoreLogic’s figures show. The inventory of existing homes for sale nationally in December fell to only 4.4 months’ worth at the current pace—the lowest level in more than 7 years, according to data from the National Association of Realtors.

In turn, December’s average prices nationwide were 11.5 percent above those of a year earlier, the biggest one-year price jump since 2005. In a statement, CoreLogic chief economist Mark Fleming said that having so many underwater homeowners locked out of the sales market is partly responsible for the tight inventory and resulting price hike.

Rising values should be good news, but they may be scaring off some buyers. The number of existing home sales dropped 1 percent from November to December, according to the NAR. Tightened lending standards also likely are making buyers shy away--on average, would-be borrowers now need a FICO credit score in the 760s to get a mortgage, much higher even than the years before the easy-credit housing boom began, and they can also be discouraged by the overwhelming about of paperwork now required to apply for a loan.

Others credit the December drop to low consumer confidence, driven partly by the government’s budget crisis: “There were some pretty nervous consumers and businesses, myself included, wondering whether the politicians were going to address the fiscal cliff,” says Tim Dwyer, CEO of title insurance company Entitle Direct. Those fiscal concerns were behind a sharp drop in consumer confidence in December, according to the Conference Board, which sponsors the monthly survey. 

Tim Rood, a former director at Fannie Mae, cites those confidence numbers, plus the fact that so many Americans have little if any savings, as key factors dampening buyer enthusiasm. A report last month from the nonprofit Corporation for Enterprise Development concluded that almost 44 percent of Americans are one emergency away from poverty. “One certainty about homeownership is that anxious people don’t buy houses. Confident people buy houses,” says Rood, now a partner at business development firm The Collingwood Group.

The underwater homeowner problem has led banks and local governments to take steps they likely wouldn’t have considered before 2008. Thirty jurisdictions nationally are considering a plan to use the laws of eminent domain, where they could seize underwater mortgages to pay off the investors at less than face value and create new loans based on the current value. That would allow distressed owners to stay in their homes, says the head of the company spearheading the effort, according to the Los Angeles Times.

And last month Bank of America announced a program that will offer “earned principal forgiveness” of up to 30 percent for homeowners owing more than 120 percent of the value of their homes and who are at least 60 days late on their payments. Under the plan, a homeowner who owes $145,000 on a home now worth $100,000 could potentially have the loan reduced to $101,500.

Time will tell whether those efforts will be enough to turn homeowners with problem loans into sellers.