Felix Salmon

Housing: Still very shaky

By Felix Salmon
February 24, 2010

I’ve been following the CoreLogic data on the number of underwater mortgages for over three years now, and it’s undoubtedly the most reliable time series we have on that front. Which is why this is so scary:

First American CoreLogic, the research firm that monitors housing equity, reported Tuesday that 11.3 million homeowners — or 24% of all homes with mortgages — were underwater as of the end of 2009. That’s up from 23% and 10.7 million borrowers three month earlier.

How could the number of underwater homeowners could have risen by 600,000 in just one quarter — especially when the latest Case-Shiller data shows national house prices more or less stable over those three months? I think the answer might lie in the seasonal adjustments: to take a couple of the more extreme examples, Dallas prices fell 0.9% on a non seasonally adjusted basis, while rising 0.1% on a seasonally adjusted basis, while Chicago fell 1.6% in nominal terms but only by 0.6% in seasonally-adjusted terms.

The biggest systemic risk posed by underwater mortgages, of course, is the fact that they’re much more likely to default. But if the decline in the value of your house is a cyclical, seasonal thing, then that’s clearly much better than if it’s likely to persist indefinitely.

On the other hand, we’re clearly in uncharted territory here — at the upper echelons of the credit scale, unsecured credit-card debt now carries a significantly lower default rate than secured mortgage debt. If the number of underwater homeowners is going up at the same time as the societal mores urging full mortgage repayment erode, then the ingredients for another real-estate bust are definitely in place.

4 comments so far | RSS Comments RSS

I’d argue that if the positive/negative valuation is so tenuously tied to seasonality that it might as well be below that benchmark all year long…I don’t think the average consumer is going to say “Oh, all will be well in three months when my homes value goes up 3% and now I have 1% equity”…

Posted by rfreeborn | Report as abusive

Good points Felix. However, what is really scary, is that almost the entire state of Nevada is underwater, and a good portion of California. The average for most other states is about 20%. There will be a reckoning!

Posted by LucidOne | Report as abusive

We should not ignore that unemployment is still going up and deflationary tendencies are starting to appear.

People know housing prices are weak, they expect them to be weak and weaken. They will not buy at prices they think will still fall. And it is known by all that millions of homes are to come onto the market.

This is the deflationary mindset and is why we see house prices still drifting. It will be the same with commercial real estate later this year when those loans start to require rolling over, all 1.4 trillion dollars of them.

That will then suck down residential prices and give us a disastrous little cascade.

Unfortunately the US is really in recession on the verge of depression, depending on the next few months.

Posted by Kina | Report as abusive

“If the number of underwater homeowners is going up at the same time as the societal mores urging full mortgage repayment erode, then the ingredients for another real-estate bust are definitely in place.”

It’s not about another real-estate bust. It’s the same bubble as before, who’s been morphing and collapsing in slow motion over two years rather than in one bang – The result of trillions of taxpayers’ dollars pumped into it.

Posted by yr2009 | Report as abusive

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