Debt outpaces home value for one-third of new owners!

BOB IVRY

Bloomberg News

August 13, 2008

Almost one-third of U.S. homeowners who bought in the last five years now owe more on their mortgages than their properties are worth, according to Zillow.com, an Internet provider of home valuations.

Home prices fell 9.9 per cent in the second quarter from a year earlier, giving 29 per cent of owners negative equity, said Zillow, the Seattle-based service that offers values for more than 80 million homes. For those who bought at the 2006 peak of the housing market, 45 per cent are now under water, Zillow said.

Negative equity and declining prices contribute to the foreclosure rate because some homeowners don’t have the cash to pay off the mortgage and end up surrendering their homes to the bank that holds the loan, said Stan Humphries, Zillow’s vice-president of data and analytics.

“For homeowners who need to sell, this is a gravely serious situation,” Mr. Humphries said. “It can also be harmful to communities where the number of unsold homes adds more to inventory and puts downward pressure on prices.”

Almost one-quarter of U.S. homes sold in the past year were for a loss, Zillow said.

In a regulatory filing late Monday, Countrywide Financial Corp. said thousands of borrowers with $25.4-billion in adjustable-rate mortgages (ARMs) owe almost as much as their homes are worth.

As of June 30, the typical Countrywide borrower owed 95 per cent of the value of his home, up from 76 per cent when the loan was made, the company said.

Seventy-two per cent of its borrowers were making less than full interest payments, and 12.4 per cent were at least 90 days delinquent.

According to Zillow, the highest percentages of homeowners with negative equity were located in California. In four of the state’s metropolitan areas – Stockton, Modesto, Merced and Vallejo-Fairfield – the number of homeowners whose mortgage debts exceeded the values of their properties topped 90 per cent, Zillow said.

In five more California areas – the Inland Empire (Riverside-San Bernardino), Bakersfield, Yuba City, El Centro and Madera – more than 80 per cent of mortgages topped values.

In Stockton and Modesto, more than half the sales in the second quarter were of foreclosed homes, Zillow said. Almost 15 per cent of sales nationwide were foreclosures, the company said.

Prices fell on a year-over-year basis in 140 out of 165 markets, Zillow said.

The 9.9-per-cent decline in home values was the largest on a year-over-year basis in at least 12 years, Zillow said. The median home price of $206,919 (U.S.) was the lowest since the fourth quarter of 2004, the company said.

“Sellers are starting to adjust their expectations,” said Zillow chief financial officer Spencer Rascoff. “More sellers accepting a loss is actually a sign of optimism. It means that the transactions might start happening. There are so many sales contingent upon the buyer selling their home.”

Even though this article is about the US market, it just goes to show the state of the over all market. I have sold many 100% loans to clients in the past. Now our market is more stable in most places and still increasing in all but a few locations, but this does not mean that Canadian consumers do more owe more than the value of their principal residence. Many do when you take in to consideration their mortgage, line of credit, credit cards, car loans and other debts. We have morphed into a live for today spending society. We need to realize that there are consequences. For the economies to improve we must first improve our own finances. How can we expect the government to balance the books if we can not balance our own. 

Cheers,

Pat