2 Million Homeowners Underwater By More Than 50%

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Yesterday I posted on the huge shadow inventory of homes in Chicago and the nation. However, CoreLogic also reported on an even bigger threat to the recovery of the housing market in the form of homeowners who are seriously underwater on their mortgages. The number they reported is staggering:

In addition to the current shadow inventory, there are 2 million current negative equity loans that are more than 50 percent or $150,000 “upside down.” These current but underwater loans have increased risk of entering the shadow inventory if the owners’ ability to pay is impaired while significantly underwater.

To put that in perspective, the official shadow inventory was reported as 1.7 MM homes. Add to that the 2 million homeowners that are more than 50% underwater and the ones that are underwater by less than 50%. Then there is an even bigger group of homeowners who have lost all or a substantial portion of their down payment.

Implications For The Housing Market

The vast majority of these homeowners are essentially trapped in their homes. I talk to them all the time and here is their dilemma. If they were to sell many would have to write a check at closing, which is either impossible for them to do or so distasteful that it is out of the question. Even if they walked away with a little cash it would not be sufficient to make a down payment on the next, better home.

So what are their choices?

  1. Walk away
  2. Stay put
  3. Rent the place out and become a landlord

No matter how you look at it there is a steadily increasing supply of homes that want to be on the market but can’t. On the one hand they are supporting prices because they are NOT on the market – at some point sellers just refuse to sell and we have been at that point for a while. On the other hand these homes are going to prevent home prices from recovering for a very long time. At the first sign of recovery these homes are going to start dribbling onto the market and they will keep prices from rising. That’s why I tell potential sellers that if they want to hang on for a better day don’t expect this housing market to come roaring back.

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