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August 12, 2009

DB: Half of Mortgages Will Be Underwater by 2010

underwater-mortgages-0809.jpg
The Business Insider had a scary post yesterday about a recent report from Deutsche Bank predicting that 25 million homeowners, more than half of those with mortgages, will have negative equity by next year. According to the Case-Shiller Index, average peak-to-trough decline nationally as of April 2009 was 33 percent, with New York only off 21 percent. Deutsche Bank thinks that national number is heading to 40 percent, with the Northeast making up for lost time; in addition, it's the blue-chip loans that will comprise much of the next wave of the negative equity plunge (only one in seven prime loans is currently underwater). And why's all this negative equity so bad? "Bottom line," writes Business Insider's Henry Blodgett, "More negative equity will lead to more foreclosures."
Half Of US Homeowners Will Be Underwater By 2011 [Business Insider]




Posted by Brownstoner at 9:00 AM | Comments (20)
Categories: Market

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Comments

don't most things lose value over time? like, pretty much everything? why are houses different?

*rob*

Posted by: PitbullNYC at August 12, 2009 9:22 AM

please ignore that early morning brainfart

*rob*

Posted by: PitbullNYC at August 12, 2009 9:23 AM

In other countries, like Japan, homes actually depreciate in value over time. It is only the value of the land that retains its value. In a non-bubble housing market, one would expect a home bought new in 2005 to sell for less if sold in 2009. So basically, your 80 year old brownstone is worthless and only the value of the land would be considered in a transaction.

Posted by: newsouthsloper at August 12, 2009 9:38 AM

But this isn't Japan. It was also said that, in 1989, the Imperial palace grounds were worth more than the state of California.

Posted by: daveinbedstuy at August 12, 2009 9:41 AM

I clicked through the entire powerpoint presentation for shits and giggles.

There are a couple references to the last housing downturn from 1987 to 1991, and how homes lost 16% of their value (in Massachusetts). But the one thing that seems relevant to me, is not home price, but monthly payment. That's what people pay to stay in their home. And so, when I looked up mortgage rates from that time period, i saw they peaked at over 11% in Oct '87, and fell gradually over four years to 9% by Oct '91.

So if anyone's a genius out there, I'd love to see the average home price computed using the average mortgage rate to see a chart of monthly payments.

My guess is the peaks and valleys level out a lot.

Posted by: chuck at August 12, 2009 9:42 AM

just came back from ireland, this is very much the case there

Posted by: binnyG at August 12, 2009 9:42 AM

All the more reason that banks should start getting smart about lowering monthly payments for home owners, even if it means (gasp!) decreasing the principal slightly.

A lot of people will pay off their mortgage when it's actually in their best economic interest to walk away. People do it for emotional reasons--they love their house, they feel like they're letting the neighborhood down if they go into foreclosure, they feel like there it is a bad personal character trait to default.

But if the cultural norms change, and people start to set aside these non-economic factors, the banks are in huge trouble. And these norms will change if we have enough banks foreclosing on houses.

Banks are being very, very stupid here. It was dumb to give people mortgages they couldn't afford to pay back. But it's even dumber to let defaulting on a mortgage become something lots of people do.

Posted by: bkrules at August 12, 2009 9:56 AM

There are several traditional ways to measure asset values. One of the them is replacement cost. An existing house shouldn't depreciate in value if the cost of building a new one increases (i.e labor costs and materials costs such as steel, copper, cement etc) go up over time.

Posted by: Boerum Hill at August 12, 2009 10:06 AM

Boerum Hill Replacement costs are down about 4 percent the past 6 months and will mst likley keep going down. Labor and materials are not in demand at all. The biggest question I have is what happens to the liar loan people when they have to refinance and cant? Should people who lied about income go to jail?

Posted by: brickoven at August 12, 2009 10:26 AM

I don't know if Deutsche Bank's economic modeling and projections will come true, but I am certain that if people's mortgages are significantly higher than rents for similar living spaces, they will walk even if still employed. I would have thought that shame, commitment or love for home would prevail but I know of 2 people who did just that. They could pay but they can rent the same downtown penthouse for half what they currently pay each month, and their $150,000 is already gone (and then some.). They couldn't get the bank to agree on a short sale amount that would actually move the place, so they moved and let the chips fall.

Posted by: Maly at August 12, 2009 10:29 AM

Japan is a special case. The reason that Japanese housing depreciates is that often the homes are not built to last. Many Japanese prefer to knock down the existing structure and build something new rather than move into something used that requires maintenance.

http://www.japantoday.com/category/commentary/view/200-year-rabbit-hutches

Posted by: eh at August 12, 2009 10:42 AM

"It was also said that, in 1989, the Imperial palace grounds were worth more than the state of California."

Posted by: daveinbedstuy at August 12, 2009 9:41 AM

Thats not surprising as I think the State of California is only worth a few hundred thousand at best.

Posted by: newsouthsloper at August 12, 2009 10:44 AM

"So if anyone's a genius out there, I'd love to see the average home price computed using the average mortgage rate to see a chart of monthly payments."

My boyfriend did this in 2004 using average national prices and mortgage rates, and found that it was cheaper to buy in 2004 than any time since the 1970s. So there.

Of course, prices have gone up somewhat since 2004.

Posted by: mopar at August 12, 2009 12:30 PM

Or I should say, my "ex."

Posted by: mopar at August 12, 2009 12:30 PM

Anyway, so half of mortgages will be underwater by 2011. Who cares?

This is only relevant if you have to sell due to illness, job loss, relocation, new baby, etc. And most people at the high end of the market have a big enough cushion to absorb the loss.

Posted by: mopar at August 12, 2009 12:32 PM

"All the more reason that banks should start getting smart about lowering monthly payments for home owners, even if it means (gasp!) decreasing the principal slightly."

If we both bought similar houses at the same time, and I'm having trouble making mortgage payments so the bank lowers both my payments and my principle, do you:

1. Cheer the bank's good business sense.
2. Suddenly claim that you too are having trouble making mortgage payments and need the bank to cut you a deal as well.

OK, ok, so you're a good person and choose option #1.

What option do most Americans who bought homes in the last 4 years choose??


When your business model is loaning people money and having them pay you back with interest, it is really bad for your long term business prospects when you let people pay you less money with no negative consequences.

This is why loan sharks traditionally break people's legs when they start missing payments. Not because they think the guy with the broken leg will suddenly start paying them back, but because they think it will encourage their customers whose legs have not yet been broken to stay current with their payments.

Posted by: northsloperenter at August 12, 2009 12:42 PM

come on mopar you dont really think that do you?

Posted by: brickoven at August 12, 2009 12:42 PM

What, BO? That people at this level of the market have a cushion? Yes, I do believe that and it is based on first-hand knowledge.

Posted by: mopar at August 12, 2009 3:26 PM

So what, I'm "underwater" already and I don't care -- I like my house, I like my neighborhood, and I can quite easily afford it. Besides, if the banks really do start letting go of that stimulus money inflation will make studios in Canarsie a million bucks by 2015. Then who will even remember there was a bust?

Posted by: Jeremy at August 12, 2009 4:56 PM

"people at this level of the market have a cushion"

No, they do not. They REFI'd to peak comps with little or nothing to show.

***Bid half off peak comps***

Posted by: Brownstones Half Off at August 12, 2009 5:40 PM

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