Homeowners Face Negative Equity Breakout

If you bought a home in the last five years there is a one out of three chance that you now owe more on your mortgage loan than your home is worth. Yipes! Could that possibly be true?

That bad news comes from Zillow.com. Zillow.com is the online service that offers residential property valuations based on tax assessments. The company reports that in 2008 2nd quarter home prices fell by almost 10{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4}. The crash in home values was the largest on a year-over-year basis in 12 years. It brought the median home price down to $206,919.

Here’s the real shock in this report. That drop put almost 30{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} of the people who bought homes since 2002 into a negative equity position!

Zillow.com says that the year 2006 was the very top of the real estate market. 45{ef6a2958fe8e96bc49a2b3c1c7204a1bbdb5dac70ce68e07dc54113a68252ca4} of those who had the misfortune of buying in that year are now underwater – they owe more than the market value of their homes.

If you are one of those people looking at negative equity, but you plan on living in your home for the next 10 to 20 years, no problem. Inflation alone will save you.

The trouble starts if when of those homeowners find they must sell for some urgent reason. How can you sell a home when you owe more on the mortgage than the market value of the home?

Oh sure, for a while every owner hopes they can price their home at breakeven and find a buyer. The problem is that a breakeven price will be thousands above the selling price of other homes in the neighborhood. Your chances of selling are about the same as winning the lottery.

If you absolutely must sell you could bite the bullet and keep the home as a rental investment. But wait, there are so many homes now on the rental market that you will never be able charge enough rent to cover your monthly mortgage payment. You will have what real estate investors call an “alligator”. That’s a property that will slowly devour your capital.

If your income is high enough you may be willing to feed your alligator for a few months – come out of pocket for the difference in rental income and mortgage payments. Your hope is that there will be an increase in the market value of you home during those months and you will be able to sell your home at an acceptable price.

Oh my, you are now a landlord with all the associated problems. If you have moved out of the area you are an absentee landlord and that multiplies the problems. Hire a property manager? That simply increases your alligator’s appetite.

Jingle Mail

That brings us to an expected increase in “jingle mail”. Jingle mail is a phrase that has recently been coined by companies that collect mortgage payments. They are receiving envelopes in the mail that contain the keys to the house rather than a check for the mortgage payments. The keys jingle as the envelope is delivered.

Homeowners who can’t make their mortgage payments face foreclosure. They can soften the blow some by offering their mortgage lender a deed in lieu of foreclosure. That saves the lender the expense of a formal foreclosure. It is still a black market on your credit history, but not quite as bad as a full out foreclosure. Oh yes, not all lenders will accept a deed in lieu of foreclosure.

The bottom line? Thousands more vacant homes coming into the market and increased supply resulting in lower real estate prices for everyone.

What can we learn from all this? Booms don’t last forever and the last ones to the party end up with the mess.