Homeowners Hanging Upside-down

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Homeowners Hanging Upside-down
by Robert Franco | 2008/03/03 |

I heard this on CNN over the weekend: "More than 30 percent of U.S. homeowners who bought in the last two years owe more on their mortgage than their house is currently worth." I found that figure staggering, so I did a little research. Here are some statistics that I found.

On average, homeowners had 56.3 percent equity in their homes in 2005, according to Demos, a public-interest research group. In 2007, that dropped to 50.4 percent. In 1973, equity averaged 68.3 percent; in the 1950s, it was upwards of 80 percent.

Why? Good question! For starters, homeowners are starting off further behind than they have in the past. It was once considered standard practice to put 20 percent when buying a home. Now, however, many opt for 100 percent financing. Starting with ZERO equity is a sure way to end with less equity than generations before us. And, when home prices drop it makes it pretty darn easy to wind up upside-down.

But, starting out that way isn't the only way to tumble over - Americans are tapping their home equity like a beer keg at a Delta Tau Chi frat party. (Useless Trivia: Delta Tau Chi was the full name of the fictional Delta House fraternity from Animal House.)

Source of Title Blog ::

U.S. property owners took out $318 billion of equity from their homes in 2006 by refinancing home loans, according to Freddie Mac, the world's second-largest mortgage buying company. Add to that $146.2 billion lent in home equity lines of credit, according to the Federal Reserve.

In all, $2.2 trillion of home equity has been liquidated since 2001, which was the first of five years of record-setting house prices and sales.
(From: Housing Slump Puts Mortgages Underwater)

It is certainly not a good trend. It is no wonder that so many Americans are loosing the American dream in foreclosure. As so many people drained the equity in their homes, or never really had any to begin with, the home price declines we have seen really began to take their toll. The old rules of requiring 20 percent down may have kept many people from being able to afford to buy a home, but it did protect them from short term lulls in the housing market - it also protected the lenders.

It really isn't surprising that Americans are using their home as their personal ATM machine to supplement their income. And, who could afford a 20 percent downpayment today? The cost of a home has increased far more than household income. Check out the Mercyman53's Weblog.

Here is the crux of the whole matter. A new house cost 1050% more in 2006 than in 1970. That means a new house in 2006 was 10 ½ times more expensive than one in 1970. By comparison, the median household income increased 452% between 1970 and 2006. The 600% difference between income and housing expense is why there is a crisis of monumental proportions plaguing this country.

The problem we have today is a combination of people's desire to live well beyond their means and the banks' willingness to hand out money like it was printed by Parker Brothers. Because of the ease at which money could be borrowed, people could afford to pay more for homes. Like any thing else, if people can afford to pay more, the price goes up; it's supply and demand. Obviously, this couldn't go on forever. Americans ran out of equity, the banks' endless supply of money began to dry up as investors realized the risk of the mortgages they were sold, and now prices are dropping.

With falling home prices and less equity - many homeowners are upside-down. Foreclosure isn't as scary as it used to be, when people actually had equity in their homes. They don't have much of an incentive to work harder to keep it if it isn't worth what they owe. In fact, many people are actually planning to let their home go, even though they could afford to keep it.

There is no doubt that home prices were due for a correction. And, that really wouldn't be a big deal in the big scheme of things, if Americans had more equity like the generations before them. Perhaps 20 percent down is an unrealistic expectation today, but even a five or ten percent downpayment would preserve some equity during minor market corrections. If people actually had some equity in their homes it would make the entire housing market more stable. That is what makes this the worst housing market ever.

Robert A. Franco
SOURCE OF TITLE
rfranco@sourceoftitle.com

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Categories: Economic Indicators, Foreclosures, Mortgage Industry

1027 words | 3969 views | 2 comments | log in or register to post a comment

	I feel the pain of these homeowners...
	I feel the pain of these homeowners that are upside-down. My appraisal January of 2007 was $300,000. We did some improvements (added a sunroom and 800 square foot deck to the pool) and the appraisal is at $285,000 now. We bought our home in 2002 for $178,000. I cannot refi. I have no equity. My rate is insane (8.3%) I am upside down and we are going to lose our home in June. How's that for your dream home becoming a nightmare.
	by Loretta Reed \| 2008/03/03 \| log in or register to post a reply

	Loretta is exactly right. The Ameri...
	Loretta is exactly right. The American dream is becoming the American nightmare for millions of homeowners. Everyday I hear people say that these homeowners knew what they were getting into and they are just getting what they deserve. To me, this argument just doesn't hold up. It’s not just about these homeowners, it’s about all homeowners. Yes, there are individuals who made bad financial decisions and they should take responsibility for this. However, the problem with such a stance is that it doesn't take into account the effect this crisis is having on the economy as a whole. Here are two recent situation we dealt with at my office. An elderly couple who was counting on the equity build up in their home to help offset the increase in the cost of living. Now, because the value of their home has declined dramatically they aren’t able to pull out the money they need. Are they getting what they deserve? A homeowner who needed to sell his house because his job had been relocated. Now, because the values have been hit so hard on his street he has been unable to sell. And is currently juggling the payments on two homes. Is he getting what he deserves? Everyone talks tough until it hits home. The point is if a house next door to you gets foreclosed on, it doesn’t affect just that homeowner. It affects the value of all the surrounding houses as well. It's in the best interest of all homeowners to see these issues get resolved.
	by Shane Kane - TitleSuccess.com \| 2008/03/04 \| log in or register to post a reply

Source of Title Blog

Robert A. Franco The focus of this blog will be on sharing my thoughts and concerns related to the small title agents and abstractors. The industry has changed dramatically over the past ten years and I believe that we are just seeing the beginning. As the evolution continues, what will become of the many small independent title professionals who have long been the cornerstone of the industry?

Robert A. Franco
SOURCE OF TITLE

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