Upside Down on Your Mortgage? You’re NOT Alone!

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Yesterday I posted a link to a story from Detroit about a bank that was so desperate to rid itself of a troubled REO property it sold the house for $1. You can read about it here. Today I read another report that was equally startling: 1/3 of homeowners who bought in the last 5 years are upside down today on their houses.

The stats came from a place called Zillow, and reported that:

  • Almost 1/4 of homes sold in the past year sold at a loss
  • 29% of homeowners who purchased during the past boom are upside down
  • 45% of homeowners who bought in 2006, when the market was peaking, are upside down
  • 90% of homeowners in certain areas of California (Modesto, Stockton, Merced and Vallejo-Fairfield) have negative equity
  • Over 80% of homeowners in Riverside-San Bernardino, Bakersfield, Yuba City, El Centro and Madera have negative equity

I’m not sure where to go with numbers like these. I guess for most people, selling their home in the next few years isn’t going to be an option – at least not until house prices begin to rebound. And, with the scaling back of the gain exclusion, thanks to the new Housing and Economic Recovery Act, it doesn’t look like the government is in the mood to encourage people to sell anyway.

But then again, regardless of a house’s value, it doesn’t actually lose money until you sell it. So in that sense, as long as you can make the mortgage payments and you aren’t needing to move any time soon, it’s not the end of the world.

For the folks that can hang on, I think sometimes that this is an overlooked point. Years ago when I was working securities law during the dot-com boom, I used to set up stock option plans, issue stocks, and monitor trading prices. I watched people become paper millionaires, and then leverage that paper into more paper. Then dot-coms went poof and most of these same people had nothing except a mountain of debt and worthless paper. So when people compare the housing devaluation to the market devaluation, it kind of bugs me. A house is still a physical thing – a place to live, unlike stock options, which are intangible until exercised and converted into shares.

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