Negative Equity in Underwater Homes

Calculated Risk gathers the data on underwater homes:

  • There are 14.75 million underwater homes and 4.1 million of these have more than 50% negative equity (the homeowners owe 50%+ more than their homes are worth).
  • The total negative equity is $771 billion.

I decided to create a picture:Wavedata  


That histogram is a case study in poor binning. Does the distribution simply level out? Is there a second mode at some point?

I agree with the comments about binning, but think they're missing a bigger point. 50-90% negative equity means an almost certain default, and there are 4 million homes left facing an almost certain default after record foreclosure levels for the last few years (that have foreclosed on a fraction of 4 million homes).

@David Wright: The distribution levels out and begins to vanish at around 90 to 100% Negative Equity. That number seems strange, but remember, Equity is (V-D)/V, so if your home has declined 50% in value (realistic in Las Vegas, Phoenix, Detroit, and some other cities), then you are "100%" underwater.

I combined the underwater data from Zandi and from CoreLogic (which are reasonably close), and filled in the "proprietary" blanks as best I could with some regression analysis to come up with absolute numbers, current valuations, and debts at each underwater level in each state. Let me know if you would like more detail.

Some tidbits: 20% of aggregate negative equity in between 0 and 25%, 15% between 25% and 50%, but 65% of that debt ($500 Billion) is >50%. I interpret this as meaning that most of the bad loan debt-losses are unavoidable, even by an unlikely significant recovery is prices, and that they will likely absorbed relatively soon, in the next few years.

5,000 foreclosures and short-sales *per day* for two or three years will be needed to clear away those loans, and in 2011-2013, all those Option-Arm loans living on borrowed time recast or exhaust their minimum payment periods.

Of the 37 million mortgages in positive equity, There is $4.6 Trillion in savings out there, or an average of $125,000 per positive-equity home. Before the crash, this was (imagined to be) almost twice as big. What a giant wealth-effect, and that's not counting the stock market.

So, this means some folks at the margin won't be taking out home equity loans either.

I think this way of defning "negative equity" is misleading. If I were to say that a mortgage is 50% under water, it would be natural to assume I mean that the house is only worth half the amount owed on the loan. But, according to the definition being used in the graph, that home would have negative equity of 100%, because the homeowner owes 100% more than the house is worth. So it is possible to have "negative equity" of 200%, 500%, or even one million percent as the house drops in value to zero. This to me makes little sense as a termonological convention.

What does the distribution of positive equity look like? Also, is there data that would allow someone to assemble such distributions through time?

How could bankers make four million mortgage loans which exceeded the prudent value of the property be at least 50% so that a 30-50% fall in real state prices would result in the mortgage exceeding fair market value by 100% or more?

Loan sharks demand both higher interest rates and higher collateral.

Or are those four million loans showing small losses in principle, which is owed to mortgage bonds, and 100% of asset value in interest, late fee, legal fees, penalties, processing fees, servicing fees, and other costs that the bank subsidiary handling the mortgage will take off the property sale with the lien holder getting pennies or nothing for their interest?

My guess is the companies originating and servicing the mortgages have stolen the capital of the investors who bought the mortgages for 30-40 million mortgages.


I think your county needs a new assessor if you have a $1175/month tenant on a $125k property.

I can't imagine you having any real foreclosure risk at all, but tell me how you got such a tenant?

If this is at all common, I need to become a landlord.

A question for you:

I purchased my home, in good faith for the going market rate - In Northern CA. Put 20% down. My note: because I was waiting to sell another home - was a 30 year fixed rate note - first 10 years interest only; amortized for the last 20 years. The 20 year amortized payment was affordable to me.

However, after the market tanked, was out of work. Found work in Northern Va.

The California county recently assessed my home at $124K - I owe $320K. Turns out this is the worst financial decision that I have ever made. When I purchased - I made the gamble that the 20% down would cover the bottom of any crash. I was wrong.

Currently, I can afford to live here and keep the home in CA. However, the home is barely rentable in CA - I can't cover PITI at all. If I get it rented. Thought I had it rented, but

Now, I can "afford" this situation, but my family's future is now at risk. I am not saving nearly enough to support my retirement years nor my children's education.

Given the facts as stated, if you were in my shoes, what would you do?

Although all gets out of bed incapable consonant in has according to may look up takes medicine, the vowels fell into the weekend horridness, the even meteorological observatory also participated in a prediction: tonight to tomorrow, will have a consonant storm...

Michael - Isn't California no-recourse? That is the biggest no-brainer since the Indians offered Manhattan Island for sea shells.

Drop the keys off at the bank and run, don't walk, from that money pit. Expensive lesson learned.

Dumb joke, mea culpa.

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