Nearly One in Three Homeowners are ‘Underwater’ with Their Mortgages
Scotty Ball, a partner with the Gainesville, Ga. law firm Stewart, Melvin & Frost, specializes in residential and commercial real estate law. Scotty will help explain the Zillow report.
Question: Tell us about this new report on the state of “underwater mortgages.” Who conducted the study?
Scotty: The study was conducted by a national real-estate information agency known as Zillow. This organization also operates an analytics bureau that studies housing trends, and it released a report a few weeks ago on the status of “underwater mortgages” in more than 150 markets across the country, including metro Atlanta and here in Hall County.
Question: What does the Zillow report reveal about the national housing market?
Scotty: Despite some recent positive trends in the housing market, the report does not present a pretty picture.
Nearly one-third (31.4 percent) of U.S. homeowners with mortgages, or 15.7 million people, were underwater on their mortgages during the first quarter of 2012, according to the Zillow Report. That means they still owe more money on their homes than they are worth.
If you add up all the negative home equity across the country, the total is staggering. Underwater homeowners collectively owe $1.2 trillion more on their homes than they are worth.
These numbers are troubling, but they still indicate a slow recovery. Last year during the first quarter, the percentage of underwater mortgages was actually one percentage point higher (32.4 percent versus 31.4 percent) than it was in this year’s first quarter.
One qualifier is needed to these distressing numbers. An underwater mortgage technically represents only a paper loss, and the majority of underwater homeowners remain current on their mortgages. In fact, the statistics show that nine in 10 will continue to make their mortgage and home loan payments on time.
Question: You mentioned that the Zillow Report also covered our region of Atlanta and Northeast Georgia?
Scotty: The numbers are even worse for metro Atlanta and some parts of our community which would be expected since Georgia is among the states hit hardest by the housing crisis of the last several years.
In metro Atlanta, more than half of homeowners are underwater on their mortgages. That is one in every two households that is underwater on their mortgage versus one in three for the rest of the country.
The Zillow organization (www.zillow.com) also breaks the numbers down in our region by zip code.
Locally, the 30507 zip code area, which covers most of East Hall, had the highest percentage of underwater mortgages at 63 percent. Next was the South Hall area around McEver Road in the 30504 zip code at 45 percent.
Other parts of Hall County, however, were closer to the national average and much better than metro Atlanta in the percentage of underwater mortgages. For instance, 30501, which is mostly Gainesville, was at 39 percent. North Hall and West Hall in the 30506 zip code were at 34 percent, and the 30542 zip code for Flowery Branch was also at 34 percent.
Question: What do all these numbers mean? Should we be discouraged if we’re one of those homeowners who has an underwater mortgage?
Scotty: Remember that an underwater mortgage is only a paper loss. The problem comes if and when you must sell your home.
For instance, if you have a job relocation, lose a job or other financial strains that require moving out of your home, you could be lucky just to break even on the sale of your house if the mortgage is underwater, especially in this current housing market.
With this perspective, you can begin to understand why the housing market overall is taking so long to recover. So many people are stuck with underwater mortgages that they simply are better off to stay put unless they have to move and that is why home sales are so slow nationwide.
Another negative economic impact of underwater mortgages is their effect on home-equity lines of credit. So many homeowners in the past have used their positive home equity to buy a new car, send their children to college, or invest in a new business. But many banks today are having to reduce or eliminate these lines of credits for homeowners with negative mortgages. This represents a huge drain on what used to be a key source of investment capital.
Question: So how do you find out if you have an underwater mortgage?
Scotty: The best way is to conduct an independent appraisal, but your local real estate agent typically can give you a good idea of home values in your neighborhood. If there are a lot of foreclosures on your street, for example, it has the effect of dragging down the value of your home and others in the immediate vicinity.
Once you have an idea of comparable home values in your neighborhood, then you can look at what you owe on your home and compare.
Keep in mind that home values on average are down about 39 percent in metro Atlanta. Here in Hall County, we’re closer to 30 percent home devaluation, depending upon where you live in the county.
The recession and the housing crisis began pushing home values down in 2007. Therefore, people who bought their homes after 2000 are more likely to have negative equity because they made their purchases at the top of the housing market.