28 Percent of Homeowners Have Negative Equity; Zillow Predicts Prices Will Fall about 8% This Year and Says It No Longer Expects the Market to Bottom before 2012

28% of U.S. Homeowners are Underwater on Mortgages

May 9, 2011

Bloomberg - More than 28 percent of U.S. homeowners owed more than their properties were worth in the first quarter as values fell the most since 2008, Zillow Inc. said today.

Homeowners with negative equity increased from 22 percent a year earlier as home prices slumped 8.2 percent over the past 12 months, the Seattle-based company said. About 27 percent of homes were “underwater” in the fourth quarter, according to Zillow, which runs a website with property-value estimates and real-estate listings.

Home prices fell 3 percent in the first quarter and will drop as much as 9 percent this year as foreclosures spread and unemployment remains high, Zillow Chief Economist Stan Humphries said. Prices won’t find a floor until 2012, he said.

“We get tired of telling such a grim story, but unfortunately this is the story that needs to be told,” Humphries said in a telephone interview. “Demand is still quite anemic due to unemployment and the fact that home values are still falling. And that tends to make people more cautious about buying.”

Dropping Home Values

Other analysts also expect homes to continue losing value this year. Oliver Chang of Morgan Stanley expects prices to fall as much as 11 percent, according to an April 25 report. Prices may fall “another 5 or 10 percent,” Robert Shiller, an economics professor at Yale University, said April 26 on Fox Business News. Home prices were 33 percent below the July 2006 peak in February, according to the S&P/Case-Shiller Composite 20-City Home Price Index, co-created by Shiller.

Prices will continue falling as more houses are lost to foreclosure, flooding the market with distressed properties, Humphries said.

Foreclosures fell to the lowest level in three years in the first quarter as lenders worked through a backlog of flawed paperwork, according to RealtyTrac Inc., an Irvine, California- based real estate information service. Foreclosure filings are likely to jump 20 percent this year, reaching a peak for the housing crisis, RealtyTrac predicted in January.

Las Vegas Highest

In Las Vegas, 85 percent of homes with mortgages were underwater, the most of any city tracked by Zillow. Other metropolitan areas in the top five were Reno, Nevada, at 73 percent; Phoenix at 68 percent; and Modesto, California, and Tampa, Florida, both at 60 percent. Zillow has tracked negative equity since the first quarter of 2009, when more than 22 percent of homes were underwater.

Property values rose in only three of the 132 regions tracked by Zillow: Fort Myers, Florida, where they gained 2.4 percent; Champaign-Urbana, Illinois, up 0.8 percent; and Honolulu, up 0.3 percent. Fort Myers prices increased after falling more than 60 percent from their 2006 peak because they “over-corrected,” Humphries said.

The first quarter’s U.S. home price decline was the steepest since the fourth quarter of 2008, when prices fell 3.9 percent, according to Zillow data. Values dropped almost 13 percent over the course of that year.

“It’s not going to be as bad as 2008,” Humphries said. “But it’s going to be worse than we thought it was going to be.”

‘Stealing Demand’

Prices were propped up in 2009 and early 2010 by federal stimulus programs, such as tax credits worth up to $8,000 for first-time homebuyers, Humphries said. That program “was stealing demand from the future,” weakening shoppers’ appetites now even as housing affordability is at its three-decade high, he said.

“In the past, people felt more bullish in a post-recession recovery,” he said. “They’d go out and spend more on homes and that would ignite hiring in construction and the mortgage industry. And they’d start to get the flywheel moving more quickly. Unfortunately, now, that flywheel is broken.”

Flashback: Half of U.S. Homeowners Will Be Underwater by 2011 (Excerpt)

August 11, 2009

Business Insider - Last week, Deutsche Bank analyst Karen Weaver published a report that shook up the "housing is recovering" crowd. She predicted that, by next year, nearly half of American homeowners with mortgages will be underwater.

Before we go into the details, here's a basic refresher on the US housing market:

• There are approximately 110 million households in the U.S.
• About 75.5 million of these are homeowners.
• Approximately 68% of the 76 million, or 51.6 million, have mortgages.
• 14 million U.S. homeowners, 27% of those with mortgages, were underwater at the end of Q1 (DB estimates)
• DB estimates that nearly half of the 52 million mortgagors will be underwater by the end of next year.

(Note that this is half of those with mortgages, not half of all households)

DB's estimates are based on city-level projections of where house prices will bottom. DB made these projections before the startlingly good Case Shiller numbers last month. If the Case Shiller numbers herald a recovery, as many bulls suggest, then DB's "underwater" forecasts may be too aggressive.

On the other hand, if the June Case Shiller numbers were just a head-fake, as we and other analysts suspect, then DB's estimates will probably be right on the money...

Read more here and here.