An alarming number of US homebuyers are underwater
cbsnews.com
cbsnews.com
Reality (deeper in the article): "The portion of underwater mortgages is still historically low..."
We need to keep calling out clickbait titles for what they are.
> Although it's not unusual for new homeowners to be underwater for a brief period, especially if they buy during the summer when prices are elevated, "It is much more pronounced this year than it normally is because prices are starting to cool," said Andy Walden, Black Knight's president of enterprise research. The portion of underwater borrowers tripled in October, he noted
I agree that the over-all situation is probably not very dire yet, but I do see a path where the rapid rise in home prices in the last few years combined with a now rapid rise in rates creates a situation where people can't or won't sell. Buyers can afford less today since the rates are higher. Anyone who saw the last few years saw the "price" of their property skyrocket (whether realized or unrealized gains). Until people forget about these high valuations, very few people are going to be willing to sell their house at a lower price (people psychologically don't like to "discount" below what they think is fair, and 35% lower is not fair, economy be damned). Anyone who recently entered a mortgage will be underwater, and likely unable to sell.
For example, I live in SF, where the average home price is (rounded) about $1M. In 2021, that was just about $5k a month in mortgage payments, which is probably what a DINK household in SF can afford. Today, a $5k/month gets you roughly $650k of house - 65% of a year ago! Anyone who bought recently, or saw a house similar to theirs sell (eg. their neighbor) is going to have trouble agreeing to sell their house for 65% of what they could have a year ago. BUT the same buyers aren't going to be able to afford the almost $8k needed to buy a $1M home today.
The only way out of this "rut" without the fed lowering rates is going to be slowly waiting for the market to forget or wait for salary inflation to eat away at the extra monthly costs.
This is nothing at all like San Francisco.
It's difficult to be underwater when the curve looks like this. It would mean just buying extremely recently. Give it time. This recent jump was unprecedented.
Q2 2020 322k
Q3 2022 456k
34% in two years
Closest analog is the jump before total meltdown in the 2008 housing crisis.
Q3 2003 192k
Q1 2007 257k
28.9% in four years
This entire move was pretty much retraced in the following two years. Imagine the carnage if the most recent move retraced similarly.
Here's a more intuitive visualization[1] of just how ridiculous the situation is.
The at-a-glance takeaway is that those who bought anytime from 2021 and today are, on average, almost certainly holding an illiquid bag that's even more overvalued than the inflation-adjusted peak of the housing bubble leading into the GFC.
The original Black Knight press release[2] cited by the article highlights:
> Of all homes purchased with a mortgage in 2022, 8% are now at least marginally underwater and nearly 40% have less than 10% equity stakes in their home, a situation most concentrated among FHA/VA loans
> More than 25% of 2022 FHA/VA purchase mortgage holders have now dipped into negative equity, with 80% having less than 10% equity
In other words, low income and veteran home buyers. What I'd like to know is what percentage of these homes were financed with adjustable-rate mortgages...based on the implied trend, those people are liable to be sucking hind tit sooner than later.
As for those with fixed-rate mortgages that are able to continue making payments, being underwater just means less future business for Black Knight...soon to be ICE's problem if/when the acquisition closes next year.
[1] https://fred.stlouisfed.org/graph/?g=kYEb
[2] https://www.blackknightinc.com/black-knights-october-2022-mo...
I bought a house in the last couple of years and then refinanced it a couple of times. I can say the interest rate spread between an ARM and fixed was not very much over the last 5 years. So I'd assume not many were issued.
You can imagine how that went.
Being underwater became an issue in the last mortgage crisis because people couldn't afford their home payments (especially when they had ARMs that were about to adjust) and needed to refinance, which is not an option if you're underwater. They then got foreclosed on, which put more homes on the market, yada yada yada death spiral.
Today, the percentage of people with ARMs is drastically lower than it was then, and lending standards are much higher. Unless people lose their jobs, they generally aren't forced to sell. That's why, despite there being low demand in the market, prices have only moved down slightly. Because there's also no supply - people are locked into 30 year fixed mortgages at 3%, and in the current interest rate environment they have no incentive to sell (barring job loss, death, divorce, etc.).
For that reason, I strongly doubt we're going to see the kind of downward spiral we saw last time. Home prices may continue to decline slowly as people who are forced to sell must do so at less than they'd like, but the lack of buyers should keep a floor under the market.
Except for the whole part about never being able to move. Even people who intend to stay in a house forever sometimes have unexpected life circumstances (both good or bad) that cause them to reconsider their long-term plans.
Suppose I have $200k of equity in a $1M house. It depreciates to $700k. I now owe the bank $100k simply to be able to sell the house. Furthermore, if home prices depreciate that much, it’s likely rents would too, so it would be impossible for rental income to cover my mortgage payment, not to mention upkeep.
Otherwise, wouldn't you rather have $30k in your pocket and a debt of $30k than having $0 in your pocket and no debt? Especially if your mortgage loan is non-recourse.
I get that it feels bad to owe more than your home is worth, but that's usually the lender's problem more than yours.
Being underwater is really bad and will be life destroying for many people, even if they never have to sell they will be far worse off on average than if they didn’t buy a house that lost value.
Historically maxing out on debt and buying property has been a winning strategy, in such an environment those who are underwater simply have to wait to be bailed out by high inflation and loose monetary policy. In my view there is a lot of change in the economy and we’re going to see some new things we haven’t seen before.
It's hard to play along with such a unrealistic hypothetical. Sure, I'd pay $5 to rid myself of $10 of debt, but lenders generally won't be willing to accept that, so around we go in circles. Generally, mortgage lenders are willing to accept short sales when they reflect market realities though.
> Being underwater is really bad and will be life destroying for many people, even if they never have to sell they will be far worse off on average than if they didn’t buy a house that lost value.
I get you lose some optionality, but for a lot of people, the market value of their house went down at the same time as mortgage rates went up. Monthly payments on a 100% financed home would be pretty similar, so I don't see how it's life destroying to be underwater when you have a similar payment to keep your house as your neighbor. Yes, if you have a forced sale, it's not great, but it's not significantly worse to be tens of thousands underwater than if you were simply at $0 equity; again, most of the time you don't end up needing to pay the underwater portiom back. Yes, if you made a large downpayment, that's no longer accessible; there's risk there, but a smaller downpayment and PMI was usually an option, and sometimes PMI isn't that expensive. Yes, it reduces your willingness to move, and that's negative in a lot of ways, but there are ways to move anyway, you mostly have to set up the new housing first before defaulting on the old housing and commit to the new place for a while because it will be harder to move going forward.
Otoh, you have leverage over the lender in a way that most borrowers don't. If the lender forecloses, they realize their loss; that makes them somewhat reluctant to foreclose. You may be able to miss more payments before foreclosure proceedings begin or get other concessions.
It's definitely a different story, IMHO, than in 2008-2009 when people were underwater and rates went down. In that case, being underwater prevented accessing lower rate financing, so people in that situation were missing out on useful services.
Why?
> 56% of Americans can't cover a $1,000 emergency expense
For these folks (56% of the entire country), equity is one of the very few sources of cash if anything happens. If they even have it. Also, for the reckless subset of them, it's also a potential source of bling like iphones or maybe cars they couldn't afford otherwise. Both good and bad will have their life changed once the equity disappears.
Note: clearly far from all 56% are homeowners, but googling "house poor" doesn't bring up numbers that are too much better.
Huh? Can I pay some (smaller) amount to the bank to have them lower my loan? Why would people pay anything but their normal loan payment?
> That's a measure on how bad it is to be underwater.
Not everything has to be spun into a free-market money-quantifies-everything definition.
The bank of Canada has increased interest rates from 0.25% during Covid to 4.25% with the latest increase this week. The economy isn't really slowing much, so a few more increases are likely next year. Plus Canada needs to keep up with the US interest rate or else their currency will depreciate which is great for exports, but crappy for imports (and thus inflation).
Cracks are starting to show. In Toronto the outlying suburbs are down 20-35% in just the last 8 months (which bring them down to pre-Covid or slightly below). A ton of people took variable rate mortgages during Covid (30% last year) so each interest rate increase is increasing their monthly payments. It's not unusual to hear people say their $2000 mortgage is now $3800/month. All while home prices are dropping.
It's going to be really interesting. I'm guessing a 2008 like correction (without the financial institution crisis like the US). Some areas will likely see 40%+ down from peak which will likely bring prices back to the early 2010's.
Another problem is that most mortgages in Canada are recourse (except Alberta). So if you can't make payments, sell, and your proceeds don't cover the remaining mortgage, well the bank is coming after your other assets for the difference.
Quite the situation.
The general cost of housing is pretty bad in the US and it seems to be even worse in Canada.
Beyond the risk of bankruptcy and underwater mortgages, I wonder how much longer its politically palatable to have housing this unaffordable - especially in Canada where it seems worse.
I wonder what (if anything) the government will (be forced to) do to address this. Its often discussed how a generation of people (millennial) were basically all renters. Meanwhile, a lot of boomers seem to depend on the value of their house to aid them through retirement. Unless society finds a way to embrace renters as the new "American dream" (or Canadian, or whatever), it seems like there will be a major problem that will one day emerge.
We're had a couple decades of continuously lower and lower interest rates, so the continuously higher and high home prices shouldn't be a surprise.
Housing prices will drop, houses will become more affordable, then we'll do another bubble. This is already the second one in my lifetime.
No, it hasn't always been; you're conflating historically consistent and reasonable cycles with the speculative manias that have occurred over the past two decades. Make no mistake: we are not in a normal cycle.
Prior to these bubbles, the next closest historical US analog over a century would have been the rebuilding that occurred after WWII, when home prices reverted back to inflation-adjusted fair value after the housing market was completely hammered by the onset of the Great Depression---a time when ballon payment mortgages were the norm, and a crisis that gave rise to the financial innovation of fixed-rate mortgages as the de facto US standard circa 1930s. This spike in home prices was largely attributable to a bona fide housing shortage (think Baby Boomers)...yet no speculative mania and no bubble arose over those decades.
To get a sense for just how ridiculous today's real estate market has become, you need to consider the situation in real (inflation-adjusted) terms[1]. No amount of contrived marketing can quantitatively justify today's egregious bubble home prices, whether it's relative to building costs (!!), population growth, or decreasing interest rates as shown in the graph, or relative to other meaningful metrics that aren't shown like increasing real disposable income or tax-advantaged benefits of the asset class.
For reference, Robert Shiller covers this topic well in his book Irrational Exuberance[2].
On a similar note to your parent post, the UK is looking quite dire as well. Interest rates aren't as high (yet), and although both countries have a strong bias towards adjustable-rate mortgages, I suspect the key difference is in the demographic of bag holders: for the UK, I'm specifically looking at fixed-income pensioners. When the first wave of adjustments kick in next year, it's going to break a lot of people with little to no financial alternative.
What's a "normal" cycle? Cycles all differ. Some are extreme like in 2008 and others are much more muted.
But regardless, housing cycles have always happened. Even Shiller admits this.
Being underwater on a loan is never fun but these borrowers are in about as good a position as you could possibly be in while underwater.
Mortgages are "underwater" because home prices are depressed due to the high interest rates.
So you mean to say that mortgages are underwater?