Underwater Mortgages and the Current Real Estate Market: Buying Opportunity or Not?

The word “underwater” would normally connote literally being under the surface.   I would usually think of the ocean, or maybe being in a

This house is interesting - as is the current real estate market

swimming pool and going under.  Either way, actual water would be a part of the instant reaction when hearing that word.  Not money, right?

Well, if you’re a personal finance blogger, the word underwater might now bring to mind real estate-related issues!  I came across an article from the LA Times that referenced some data showing that over 31% of U.S. homeowners are now underwater on their mortgages.  So, just over 3 in 10 homeowners here in the US have been hit by the real estate problems in this particular way.

When one is underwater, more is owed on the mortgage than the value of the actual home.  A very simple example might be a case of someone who put down $40,000 on a $200,000 home, thus owing $160,000.  If the value of the home suddenly dropped by 25% to $150,000, the home would be worth less than the amount owed on the mortgage.  The homeowner is now underwater on the mortgage.

Even more staggering is a figure noting that of those who are underwater, 15% owe at least double the amount of their home’s value!   Applying that to the 31% figure noted earlier, one can say that almost 1 in 20 homeowners in the U.S. have a home no more than ½ of what they owe on the mortgage!

With such abysmal figures, it makes me think once again about whether or not this is a good time to buy a home.  It sure seems like a much better time to buy for somebody currently renting! But regardless, with home prices dropping so much, people who held off buying a few years ago have to be thanking their lucky stars they stayed on the sidelines.

Is this a good time to buy? Well, prices have dropped despite interest rates being exceptionally low by historical standards.  The thing is, I wonder if prices have more to drop.  I suspect that there are quite a few people who would like to move, but are probably overpricing their homes. Why? If they are underwater or close to it, they don’t want to take a paper loss on a home sale.  My guess is that there are some homes for sale that are at lower prices than they would have been a few years ago, but not low enough. People just don’t want to take a big loss.

With such stats, I wonder if we’re becoming a less mobile society for the immediate term.  If you buy, it’s not like you can expect to resell quickly as you might have been able to a decade ago.  With less movement in the market, people seem to be stuck in place a bit more.

My takeaways:

  • In some markets, home prices might still have some room to drop, and we might not have seen the price floor yet
  • If you buy, utilize all available data when making a home purchase. The short sales out there might really wreak havoc with market values.
  • Be prepared to view your home as being a much less liquid asset than it might have been a decade ago. In other words, be ready to stay there for a while, even longer than you need to, so like the place you’re getting.

My Questions for You:

What are your thoughts as you read that almost 1 in 3 homeowners is underwater on their mortgage, and 15% of that group owes twice as much as the home value?

Does this surprise you in terms of how high these figures are?

Do you tend to view this as a buying opportunity to be taken advantage of now? Or, do you think that the market will likely head lower and that buying now could be premature?

Comments

  1. says

    That’s pretty scary, but that doesn’t necessarily mean it will stay that way. In Canada we’re not having the issues that the states is with home pricing, etc. I doubt many Canadians are underwater considering that home prices keep on creeping up. But, even if they are, the housing market will bounce back, it always does.

  2. says

    I’m not surprised about the current numbers. I think the housing market will SLOWLY turn around soon. I think you could buy now and take a small loss in the next couple of years (potentially) or you’d be fine waiting a couple years and prices might go up a couple percent. I got extremely lucky as to when I was ready to buy a house (last fall). I bought my townhouse for 46% of what the previous owners bought it for 6 years earlier. If I had been out of college and ready to buy 6 years ago that could have been me!

  3. says

    huge buying opportunity. bank are slowly releasing the inventory. buy cheap, sell cheap. we buy 30% below. even if market drops we are good. no such thing as completely no risk. if the odds are on my side. the risk is in not doing deals. the question i ask is, how much money could you be making by investing now?

  4. says

    Values are slowly rising and every payment you make brings you that much closer to being back above water. Probably not for the 15% you mentioned that owe double what the house is worth, but for a great many of underwater homeowners, the resolution will come simply by time. Once people realize this and the defaults stop, that will result in even less foreclosures, and prices will rise even more. Every price rise and every payment decreases the amount ‘underwater’. I think we’ve turned the corner.

    • Squirrelers says

      MB – I think it might depend on where people live. Around here (suburban Chicago), things seem to be declining even more. We’ll see about turning that corner!

      • says

        The Chicago area was later than other metro areas in seeing values drop; we’ll be late to seeing improvements, too.

        Last December I was quite upset to find out that my house was appraised at $20k *less* than I had purchased it for in 2001. I was turned down for refinancing because this drop in assessed value put me at less than 20% equity. The decline in value has everything to do with comparable sales in the area including several foreclosed and short sale properties and the more rigourous assessment process. So I don’t have one of the super low mortgage rates that many people have now, but I’m still paying less than 5% for my mortgage and my house isn’t underwater. That’s the silver lining, I guess.

        I expect that the Chicago area will see real estate values improve by 2014. In the meantime, I just continue to pay a bit extra toward my principal and keep my home comfortable for me to live in.

        • Squirrelers says

          Linda – it seems like you have a solid approach to your situation, based on how you describe it. I think your 2014 assessment sounds pretty reasonable, actually.

  5. Crystal says

    Most of the people buying in this market are either people with very good credit moving up or actually groups of people in investment funds that are buying real estate as an investment. They are grouping their money together and walking in with cash offers and taking the monthly rent as income and paying it to the investors.

  6. says

    I don’t know anyone looking to buy right now but I hope things will turn up soon. That’s a cool pic btw. I’ve seen an octagon house before, they’re really cool!

  7. says

    Here is South Florida, home prices are still going down. One of my colleagues bought in to a marginal rise thinking it as an end, but prices declined again. I don’t know when to go in, but I need to buy sooner.

    • Squirrelers says

      SB – With prices having declined so much, yet interest rates low, it’s tempting on the surface for many. But I do wonder how low things will keep going.

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