Underwater mortgage stats under question
Jan 2011 13

You hear in the news everyday that a lot of people, as much of 25% of loan borrowers, owe more on their home mortgage loans than their properties are worth. These mortgages are called “underwater”. The term is used whether the owner is estimated to owe $1 more on his/her loan than his/her home is worth or $1 million.

But, further analysis of the data collected and reported has some wondering if the number is wildly inflated. Stopping for a moment from considering does it even matter, the idea that what we’ve heard is not based on any sort of reality, is startling.

Wall Street Journal columnist Carl Bialik discusses it in his weekly column and on his WSJ ‘Numbers Guy’ blog.

[I]n a rare instance of mild good news in the housing market, the 1-in-4 figure, and the fear it provokes, seem overblown. It is calculated using assumptions in ways that inflate the number of underwater homes. And more than half of these homes are underwater by a small margin, meaning that for various reasons those homes are unlikely to trigger an epidemic of defaults.

First off, consider that a third of Americans who own their homes actually “own” them – they have no mortgage loan outstanding. So, they’re in no danger of default.

As he says, Mr Bialik estimates, based on data he collected from the very same sources* that report the high number of underwaters, half of these underwaters would owe a small amount if they had to sell. (Of course, why would anyone have to sell unless he/she was having financial difficulty?)

So you need to do all these calculations before you get even close to the number everyone wants: how many homeowners currently with mortgage loans outstanding are likely to default – to walk away from their mortgages?

The “real” number is much smaller than you hear in the news.

What’s even more important to us, in Boston and Massachusetts and New England, is that the majority of owners with underwater loans are far, far away from here.

The problem also is concentrated in several states. Arizona, California, Florida, Michigan and Nevada had about 31% of mortgaged homes but 53% of underwater ones.

Information is useful, most of the time. It helps us form opinions, from which we can act. So, the WSJ provides more information to consider.

The point about “does it even matter” is that, until the economic meltdown, almost all homeowners with mortgages were “above water”. Only with the cataclysmic events of the past two-three years have so many people ended up with what are, at least for now, “bad” investments. Whether the number 5%, 15%, 25% or even 50% doesn’t really matter, if it means people aren’t free to do whatever they please in regard to holding on or selling their homes.

More: Underwater Homes Estimate of One in Four Springs Leaks

Also: Housing Statistics Hit Rough Waters

*Those sources are CoreLogic and Zillow.com

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