HousingStorm.com

22.6% of homeowners with mortgages now owe more than their homes are worth, according to First American Core Logic data.

An additional 4.9% have 5% equity or less.

If you figure that the average transaction costs of selling your home run about 7%, then we can estimate about 7% of borrowers technically have equity, but would be effectively underwater if they needed to sell.

All in all, about 30% of mortgage borrowers would either have to bring cash to the closing table, or attempt a short sale if they were going to move.

Using the same estimates of closing costs, we can figure that:

• 55% of Arizona borrowers are effectively underwater
• 41% of California borrowers are effectively underwater
• 51% of Florida borrowers are effectively underwater
• 45% of Michigan borrowers are effectively underwater
• 70% of Nevada borrowers are effectively underwater

First American Core Logic adds:

• Nearly 10.7 million, or 23 percent, of all residential properties with mortgages were in negative equity as of September, 2009. An additional 2.3 million mortgages were approaching negative equity, meaning they had less than five percent equity. Together negative equity and near negative equity mortgages account for nearly 28 percent of all residential properties with a mortgage nationwide.

• The distribution of negative equity is heavily concentrated in five states: Nevada (65 percent), which had the highest percentage negative equity, followed by Arizona (48 percent), Florida (45 percent), Michigan (37 percent) and California (35 percent). Among the top five states, the average negative equity share was 40 percent, compared to 14 percent for the remaining states. In numerical terms,
California (2.4 million) and Florida (2.0 million) had the largest number of negative equity mortgages accounting for 4.4 million or 42 percent of all negative equity loans

• The rise in negative equity is closely tied to increases in pre-foreclosure activity. At one end of the spectrum, borrowers with equity tend to have very low default rates. At the other end, investors tend to default on their mortgages once in negative equity more ruthlessly: their default rate is typically two to three percent higher than owner-occupied homes with similar degrees of negative equity. For the highest level of negative equity, investors and owners behave very similarly and default at similar rates (Figure 4). Strategic default on the part of the owner occupier becomes more likely at such high levels of negative equity.

Negative equity is the driving force behind most homeowner’s decision to strategically default. Declining equity today will result in more defaults in 2010 and more bank-owned homes on the market in 2011.

Clouding economists’ predictions is a factor that can’t accurately be forecasted: Walking away from mortgages is becoming more socially-acceptable. More walk-aways means more foreclosures and lower prices, producing more walk-aways.

The death-spiral will continue until there is legitmate public belief that home prices are rising again and the economy is improving.

The Wall Street Journal adds:

Most U.S. homeowners still have some equity, and nearly 24 million owner-occupied homes don’t have any mortgage, according to the Census Bureau.

But negative equity “is an outstanding risk hanging over the mortgage market,” said Mark Fleming, chief economist of First American Core Logic. “It lowers homeowners’ mobility because they can’t sell, even if they want to move to get a new job.” Borrowers who owe more than 120% of their home’s value, he said, were more likely to default.

Mortgage troubles are not limited to the unemployed. About 588,000 borrowers defaulted on mortgages last year even though they could afford to pay — more than double the number in 2007, according to a study by Experian and consulting firm Oliver Wyman. “The American consumer has had a long-held taboo against walking away from the home, and this crisis seems to be eroding that,” the study said.

Related posts:

1. One in Four Borrowers Is Underwater From the wall street journal, 11-24-09, by Ruth Simon and James R. Hagerty The proportion of U.S. homeowners who owe...
2. Many Homeowners Paid Their Lender For The Right To Strategically Default Homeowners unknowingly paid more in closing costs because their state laws prohibit the lender from coming after them on underwater...
3. California Million-Dollar Home Sales Fall DataQuick reports Million-dollar home sales plummet in Golden State The number of California homes that sold for $1 million-plus declined...