48% of Homes Under Water by 2011
by Tim Manni
The number of under water borrowers, or those who owe more on their home loan than their property is worth, will increase to 48% by 2011, said Deutsche Bank yesterday. Deutsche says the number, which by their estimates will nearly double in about two years, will encompass a new class of borrowers, prime:
“We project the next phase of the housing decline will have a far greater impact on prime borrowers,” Deutsche analysts Karen Weaver and Ying Shen said in the report.
Of prime conforming loans, 41 percent will be “underwater” by the first quarter of 2011, up from 16 percent at the end of the first quarter 2009, it said. Forty-six percent of prime jumbo loans will be larger than their properties’ value, up from 29 percent, it said.
Why Prime Loans?
When the housing crisis began, states were ravaged by the subprime failures; in the months and years since, that wave of subprime foreclosures has broken and rolled back. Lenders have all but ceased issuing anything subprime, and beside FHA loans, prime — whether conforming or jumbo — became the main option for most borrowers.
Since then, the flagging economy has caused millions of job losses, fueling more loan failures especially among “prime borrowers.” Furthermore, falling home prices have seen some homeowners “walk away” from their homes that were so far under water that even getting back to a zero equity level was impossible anytime soon. This is a classic case of “good borrowers gone bad”:
The drop in home prices is fueling a vicious cycle of foreclosures as it eliminates homeowner equity and gives borrowers an incentive to walk away from their mortgages. The more severe the negative equity, the more likely are defaults, since many borrowers believe prices will not recover enough.
When Will Primes Recover?
Within recent months, housing statistics have been consistently improving. While Reuters does classify Deutsche’s report as “another blow to the housing market,” several other housing reports have begun to show a true reversal in the real estate downturn. We wonder, with an improving economy and firming housing markets (and hopefully more of the same by 2011), how did Deutsche arrive at their conclusions?
While Federal housing incentives tend to cater to first-time, mostly conforming borrowers, some experts have begun to say that the high-end markets have missed out on the budding rebound. The high-end market is a small but important portion of the housing market:
The divide between the mass market and the high-end — generally defined as homes that cost above $750,000 — partly reflects the effects of Washington’s housing-rescue plan, which is producing winners and losers.
Policymakers have helped spur sales of lower-priced homes by offering first-time buyers a federal tax credit of as much as $8,000, by driving mortgage rates to near 50-year lows and by expanding the mission of the Federal Housing Administration, which will guarantee mortgages for consumers buying homes with down payments as low as 3.5%.
Do you think Deutsche’s report is accurate, inaccurate, or way off base? What do you think the state of the housing market be in 2011?
For more, check out the following story:
Home Prices: The Statistic That Matters Most?
