One in five US homeowners with mortgages owe more to their lenders than their homes are worth, and the rate will increase as housing prices drop in states that have so far avoided the worst of the crisis, a new study shows.
About 8.31 million properties had negative equity at the end of the year, up 9% from 7.63 million at the end of September, according to the study released Wednesday by First American CoreLogic. The percentage of “underwater” borrowers rose to 20% from 18% over that time.
The study covered 43 US states and Washington, D.C.
While states such as California, Florida and Nevada were particularly stressed, the study showed worrying signs of deterioration in relatively healthy parts of the nation.
“The economic slowdown is broadening,” said Sherrill Shaffer, a banking professor at the University of Wyoming at Laramie and a former Federal Reserve official. “As more people lose jobs, it will be more difficult to sustain the levels of pricing and home ownership, and that is a big factor driving down housing prices in more parts of the country.”
Arizona, California, Florida, Georgia, Michigan, Nevada and Ohio remained the most stressed states, with 62% of underwater borrowers and just 41% of mortgages. Other areas, though, also face more stress. Connecticut, for example, saw a 25% increase in homes with negative equity, while Washington D.C. had a 44% increase.
“Even I continue to be surprised at the tentacles of this financial and economic debacle,” said Robert MacIntosh, chief economist at Eaton Vance Management in Boston. “More people are being laid off, resulting in reduced income and therefore less consumption. That leaves fewer people with money to buy homes, and the mentality is that people believe they should wait six months rather than buy now. Less demand means falling prices.”
Roughly 68% of US adults own their own homes, and about two-thirds of these have mortgages. Many economists expect the nation’s unemployment rate to rise above 9% before the recession ends, up from January’s 7.6%.
CALIFORNIA, NEVADA UNDER STRESS
California had 1.9 million borrowers with negative equity, more than any other state, followed by Florida’s 1.28 million. About three in 10 borrowers in both states were underwater. By other measures, Nevada was the most stressed, with 55% of owners having negative equity and borrowers on average owing 97% of what their homes are worth. About 28% owe more than 125% of their homes’ value.
Michigan had 40% of its homeowners underwater, while Arizona had 32%.
New York fared best, with just 4.7% of borrowers with negative equity and an average 48% loan-to-value ratio, though this could change as employment and bonuses slide in the financial services industry. According to the S&P/Case-Shiller Home Price Indices, prices of US single-family homes slumped 18.5% in December from a year earlier, the biggest drop in the 21-year history of the data.
Many lenders are taking steps to keep borrowers out of foreclosure. The Obama administration has backed legislation that could broaden powers of bankruptcy judges to modify mortgages for troubled borrowers. Among major lenders, only Citigroup Inc has supported such a plan.
MacIntosh expects housing prices to keep falling until “well into” 2010. “There is no magic bullet or magic arrow here,” he said. “It is a question of trying to come up with ideas and seeing what happens. It could take a long time.” First American CoreLogic is an affiliate of title insurance and real estate services company First American Corp. (Reuters)