How’s this for odds: If you have a house in Las Vegas, there’s a 58% chance you owe more on your mortgage than the place is worth. Nevada, of course, is ground zero for the real estate bust but it’s hardly alone in having truckloads of “underwater” homeowners. As of December, 19.8% of mortgage holders nationwide had negative equity in their houses, according to a new report by loan-tracker First American CoreLogic. That tally, which takes into account both first and second mortgages, represents 8.3 million homeowners, 700,000 more than when the firm checked in September.
The trend is particularly disturbing because of its implications for foreclosures. As house prices continue to decline and more people find themselves paying mortgages above the value of their properties, the risk increases that they’ll start walking away in droves. But “you have to be very careful in jumping to conclusions,” says First American chief economist Mark Fleming. “Just because your house is worth less than your outstanding mortgage doesn’t mean you’re going to go into foreclosure or anything like that.” Even for people awash in debt, homes are still places to live. If prices are given enough time to recover, they might still be a good investments, too.
A bigger problem is the tanking economy. Lose a job and paying the mortgage becomes more of an issue. Since the house is worth less than you owe on it, you can pretty much forget about refinancing or selling, the old get-out-of-jail-free cards when you could no longer make your payments. So maybe we should be most worried about the 50% of homes that are underwater in the Detroit area. Or odd as it may sound Rhode Island, where the unemployment rate, at 10%, is second only to Michigan, and where 15.7% of mortgage holders are underwater, up from 12.1% in September.
According to the First American CoreLogic report, the states with the highest percentage of negative-equity borrowers are the usual suspects. After Nevada and Michigan , Arizona , Florida and California round out the top five. Those statewide averages, though, mask a lot of local variation. One pattern: exurbs, where homes are newer and loans more likely to have been signed during the bubble years, are harder hit. For instance, in the metro area that includes Los Angeles, 23% of homeowners are faced with negative equity. Fifty miles to the east, in the area that includes Riverside, 45% are.
Another trend: a creeping problem in the Midwest. It’s true that property markets never went wild in Des Moines or Omaha like they did in Merced and Fort Myers, but this means even modest declines in home values can erase equity, especially for recent buyers who have less of a cushion against falling prices. In Iowa, 18.6% percent of homeowners have negative equity; in Nebraska the figure is 16.6% .
By some measures, such unlikely spots are in even more danger than California, which is suffering a brutal real estate slump after years of speculative excess. That’s because midwesterners owe more on their properties than left-coasters. The average loan-to-value ratio in California is 70%, while Nebraska and Iowa clock in at 75% and 76%, respectively. As the recession deepens and home prices continue to slide, there are fewer and fewer places to hide.
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