Upside down nation

America's Most In-Debt Households

Excerpt:

Falling home prices and resetting loans have been cruel to homeowner equity: nationwide. Americans' homeowner equity represents 46% of their properties' value; that's down from 60% at this time last year, and a far cry from the 67% high achieved in 2000.

But that was before unproven mortgage products became de rigueur. If you think an average of 19% equity is low, when you consider the loans made post-2004, the picture grows bleaker.

"Most mortgages made between the fall of 2004 and the fall of 2007, the majority of them are underwater," says Mark Zandi, chief economist at Moody's Economy.com, describing negative-equity situations in which more is owed on the home than it's worth.

"There are 9.6 million homeowners underwater, and most of them are those that bought from the end of 2004 through the end of 2007 in places like California and Florida and Nevada."

Price declines, one of the leading causes of equity drops, occur for a wide range of reasons, whether because of basic supply and demand, poor access to credit for potential borrowers, a sliding local economy where buyers have less to spend, or an appraised value inflated by overeager underwriters.

In Las Vegas or Phoenix, where prices exploded in the early 2000s, builders rushed to manufacture as much inventory as possible and lenders were less than judicious with credit. As prices started to fall in 2006, homeowners began walking away from resetting rates, homebuilders couldn't find buyers, and all the jobs that had been created by the construction frenzy melted away.

Price declines, resetting rates and job losses are the leading determinants of foreclosures, which totaled 739,714 in the second quarter of 2008, according to RealtyTrac, an Irvine, Calif.-based brokerage.

If a home is worth more than the value of the loan, for example, and there are buyers willing to acquire it, a property owner who falls behind on payments can simply sell the home at a slight loss. But when the loan exceeds the home's worth and buyers are scarce, homeowners, weighed down with higher than expected monthly payments, have little choice but to foreclose.

Comment: I have a sense that this housing crisis may take 2-3 years before resolved. MSP mentioned: "residents of ... Minneapolis-St. Paul own a dismal 27% of their home's value in equity"