5 ms·

An alarming number of US homebuyers are underwater

45 points by lxm 4y ago

awillen 4y ago
If you're buying a house to live in, being underwater doesn't really matter as long as you can make payments. It's not great, obviously, but if you made the purchase to live there for a couple of decades, not as an investment, then the paper value of your home isn't especially meaningful. Being underwater became an issue in the last mortgage crisis because people couldn't afford their home payments (especially when they had ARMs that were about to adjust) and needed to refinance, which is not an option if you're underwater. They then got foreclosed on, which put more homes on the market, yada yada yada death spiral. Today, the percentage of people with ARMs is drastically lower than it was then, and lending standards are much higher. Unless people lose their jobs, they generally aren't forced to sell. That's why, despite there being low demand in the market, prices have only moved down slightly. Because there's also no supply - people are locked into 30 year fixed mortgages at 3%, and in the current interest rate environment they have no incentive to sell (barring job loss, death, divorce, etc.). For that reason, I strongly doubt we're going to see the kind of downward spiral we saw last time. Home prices may continue to decline slowly as people who are forced to sell must do so at less than they'd like, but the lack of buyers should keep a floor under the market.
- touchpadder 4y ago
  - dang 4y ago
    We ban accounts that post like this, so can you please make your substantive points thoughtfully in the future? It's necessary regardless of how wrong someone is or you feel they are. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
- MontyCarloHall 4y ago
  >If you're buying a house to live in, being underwater doesn't really matter as long as you can make payments. It's not great, obviously, but if you made the purchase to live there for a couple of decades, not as an investment, then the paper value of your home isn't especially meaningful. Except for the whole part about never being able to move. Even people who intend to stay in a house forever sometimes have unexpected life circumstances (both good or bad) that cause them to reconsider their long-term plans.
  - toomuchtodo 4y ago
    Yes, those people will be selling at a loss, performing a short sale, or learning what it’s like to be a landlord.
    - MontyCarloHall 4y ago
      In many cases, people would not be able to afford this. Suppose I have $200k of equity in a $1M house. It depreciates to $700k. I now owe the bank $100k simply to be able to sell the house. Furthermore, if home prices depreciate that much, it’s likely rents would too, so it would be impossible for rental income to cover my mortgage payment, not to mention upkeep.
- cjbgkagh 4y ago
  How much would people pay to not be underwater? That's a measure on how bad it is to be underwater. Just because you're not forced to sell and 'crystalize' your losses doesn't mean they're not real.
  - toast0 4y ago
    Paying extra principle payments to get out of being underwater probably isn't economically rational, unless it's a prerequisite for something of value. If you're underwater and have an ARM, maybe you want to refi to a fixed rate if today's rates are under your rate cap, etc. Maybe it looks bad on your security clearance, or impacts your ability to get other loans. Otherwise, wouldn't you rather have $30k in your pocket and a debt of $30k than having $0 in your pocket and no debt? Especially if your mortgage loan is non-recourse. I get that it feels bad to owe more than your home is worth, but that's usually the lender's problem more than yours.
    - twelve40 4y ago
      Paying with one's principles sounds terrible. But, fun aside, there is actually a segment of people for whom this might be pretty bad news, now that i think about it. > 56% of Americans can't cover a $1,000 emergency expense For these folks (56% of the entire country), equity is one of the very few sources of cash if anything happens. If they even have it. Also, for the reckless subset of them, it's also a potential source of bling like iphones or maybe cars they couldn't afford otherwise. Both good and bad will have their life changed once the equity disappears. Note: clearly far from all 56% are homeowners, but googling "house poor" doesn't bring up numbers that are too much better.
    - cjbgkagh 4y ago
      I should have been clearer with the hypothetical; there is a value between zero and however much the property is underwater that people would be willing to pay to no longer be underwater. The max of that value is equal to how bad it is for that person. Being underwater is really bad and will be life destroying for many people, even if they never have to sell they will be far worse off on average than if they didn’t buy a house that lost value. Historically maxing out on debt and buying property has been a winning strategy, in such an environment those who are underwater simply have to wait to be bailed out by high inflation and loose monetary policy. In my view there is a lot of change in the economy and we’re going to see some new things we haven’t seen before.
- boopboopbadoop 4y ago
  This is the kind of thing a real estate agent will tell you before they suggest you raise your bid. The fact is that it does matter - you could have bought a better house with the difference, your monthly payments could have been lower, etc.
  - boopboopbadoop 4y ago
    Recent homebuyers and real estate agents downvoting me
msufan 4y ago
Headline: "An alarming number of US homebuyers are underwater" Reality (deeper in the article): "The portion of underwater mortgages is still historically low..." We need to keep calling out clickbait titles for what they are.
- Mistletoe 4y ago
  https://fred.stlouisfed.org/series/MSPUS https://fred.stlouisfed.org/series/MSPUS It's difficult to be underwater when the curve looks like this. It would mean just buying extremely recently. Give it time. This recent jump was unprecedented. Q2 2020 322k Q3 2022 456k 34% in two years Closest analog is the jump before total meltdown in the 2008 housing crisis. Q3 2003 192k Q1 2007 257k 28.9% in four years This entire move was pretty much retraced in the following two years. Imagine the carnage if the most recent move retraced similarly.
  - metaphor 4y ago
    Nominal terms may not be the best way to look at it. Here's a more intuitive visualization[1] of just how ridiculous the situation is. The at-a-glance takeaway is that those who bought anytime from 2021 and today are, on average, almost certainly holding an illiquid bag that's even more overvalued than the inflation-adjusted peak of the housing bubble leading into the GFC. The original Black Knight press release[2] cited by the article highlights: > Of all homes purchased with a mortgage in 2022, 8% are now at least marginally underwater and nearly 40% have less than 10% equity stakes in their home, a situation most concentrated among FHA/VA loans > More than 25% of 2022 FHA/VA purchase mortgage holders have now dipped into negative equity, with 80% having less than 10% equity In other words, low income and veteran home buyers. What I'd like to know is what percentage of these homes were financed with adjustable-rate mortgages...based on the implied trend, those people are liable to be sucking hind tit sooner than later. As for those with fixed-rate mortgages that are able to continue making payments, being underwater just means less future business for Black Knight...soon to be ICE's problem if/when the acquisition closes next year. [1] https://fred.stlouisfed.org/graph/?g=kYEb https://fred.stlouisfed.org/graph/?g=kYEb [2] https://www.blackknightinc.com/black-knights-october-2022-mortgage-monitor/ https://www.blackknightinc.com/black-knights-october-2022-mo...
bagels 4y ago
An alarming number -> an alarming number of recent buyers -> 250,000. Is that number alarming?
deleted 4y ago
[deleted]
rgmerk 4y ago
As I understand it. most of these borrowers are on fixed rate mortgages at very low interest rates. Furthermore, with the strong labor market their wages are likely going up in nominal terms, and furthermore their chances of losing their job and not being able to find another one are also low. Being underwater on a loan is never fun but these borrowers are in about as good a position as you could possibly be in while underwater.
nunez 4y ago
FUD. Mortgages are "underwater" because home prices are depressed due to the high interest rates.
- CogitoCogito 4y ago
  > Mortgages are "underwater" because home prices are depressed due to the high interest rates. So you mean to say that mortgages are underwater?
refurb 4y ago
I'm keeping an eye on Canada. They had barely a blip in 2008, and the same run up post-2008, so the average home sale price was 2x that of the US in 2021, despite no 30-year fixed mortgages (most float or are fixed for 5-years at most). During Covid prices were up 20-30% over those two years. Absolute insanity. The bank of Canada has increased interest rates from 0.25% during Covid to 4.25% with the latest increase this week. The economy isn't really slowing much, so a few more increases are likely next year. Plus Canada needs to keep up with the US interest rate or else their currency will depreciate which is great for exports, but crappy for imports (and thus inflation). Cracks are starting to show. In Toronto the outlying suburbs are down 20-35% in just the last 8 months (which bring them down to pre-Covid or slightly below). A ton of people took variable rate mortgages during Covid (30% last year) so each interest rate increase is increasing their monthly payments. It's not unusual to hear people say their $2000 mortgage is now $3800/month. All while home prices are dropping. It's going to be really interesting. I'm guessing a 2008 like correction (without the financial institution crisis like the US). Some areas will likely see 40%+ down from peak which will likely bring prices back to the early 2010's. Another problem is that most mortgages in Canada are recourse (except Alberta). So if you can't make payments, sell, and your proceeds don't cover the remaining mortgage, well the bank is coming after your other assets for the difference. Quite the situation.
- vineyardmike 4y ago
  > They had barely a blip in 2008, and the same run up post-2008, so the average home sale price was 2x that of the US in 2021 The general cost of housing is pretty bad in the US and it seems to be even worse in Canada. Beyond the risk of bankruptcy and underwater mortgages, I wonder how much longer its politically palatable to have housing this unaffordable - especially in Canada where it seems worse. I wonder what (if anything) the government will (be forced to) do to address this. Its often discussed how a generation of people (millennial) were basically all renters. Meanwhile, a lot of boomers seem to depend on the value of their house to aid them through retirement. Unless society finds a way to embrace renters as the new "American dream" (or Canadian, or whatever), it seems like there will be a major problem that will one day emerge.
  - 4y ago

45 points by lxm 4y ago

If you're buying a house to live in, being underwater doesn't really matter as long as you can make payments. It's not great, obviously, but if you made the purchase to live there for a couple of decades, not as an investment, then the paper value of your home isn't especially meaningful. Being underwater became an issue in the last mortgage crisis because people couldn't afford their home payments (especially when they had ARMs that were about to adjust) and needed to refinance, which is not an option if you're underwater. They then got foreclosed on, which put more homes on the market, yada yada yada death spiral. Today, the percentage of people with ARMs is drastically lower than it was then, and lending standards are much higher. Unless people lose their jobs, they generally aren't forced to sell. That's why, despite there being low demand in the market, prices have only moved down slightly. Because there's also no supply - people are locked into 30 year fixed mortgages at 3%, and in the current interest rate environment they have no incentive to sell (barring job loss, death, divorce, etc.). For that reason, I strongly doubt we're going to see the kind of downward spiral we saw last time. Home prices may continue to decline slowly as people who are forced to sell must do so at less than they'd like, but the lack of buyers should keep a floor under the market.

touchpadder 4y ago
- dang 4y ago
  We ban accounts that post like this, so can you please make your substantive points thoughtfully in the future? It's necessary regardless of how wrong someone is or you feel they are. https://news.ycombinator.com/newsguidelines.html https://news.ycombinator.com/newsguidelines.html
MontyCarloHall 4y ago
>If you're buying a house to live in, being underwater doesn't really matter as long as you can make payments. It's not great, obviously, but if you made the purchase to live there for a couple of decades, not as an investment, then the paper value of your home isn't especially meaningful. Except for the whole part about never being able to move. Even people who intend to stay in a house forever sometimes have unexpected life circumstances (both good or bad) that cause them to reconsider their long-term plans.
- toomuchtodo 4y ago
  Yes, those people will be selling at a loss, performing a short sale, or learning what it’s like to be a landlord.
  - MontyCarloHall 4y ago
    In many cases, people would not be able to afford this. Suppose I have $200k of equity in a $1M house. It depreciates to $700k. I now owe the bank $100k simply to be able to sell the house. Furthermore, if home prices depreciate that much, it’s likely rents would too, so it would be impossible for rental income to cover my mortgage payment, not to mention upkeep.
cjbgkagh 4y ago
How much would people pay to not be underwater? That's a measure on how bad it is to be underwater. Just because you're not forced to sell and 'crystalize' your losses doesn't mean they're not real.
- toast0 4y ago
  Paying extra principle payments to get out of being underwater probably isn't economically rational, unless it's a prerequisite for something of value. If you're underwater and have an ARM, maybe you want to refi to a fixed rate if today's rates are under your rate cap, etc. Maybe it looks bad on your security clearance, or impacts your ability to get other loans. Otherwise, wouldn't you rather have $30k in your pocket and a debt of $30k than having $0 in your pocket and no debt? Especially if your mortgage loan is non-recourse. I get that it feels bad to owe more than your home is worth, but that's usually the lender's problem more than yours.
  - twelve40 4y ago
    Paying with one's principles sounds terrible. But, fun aside, there is actually a segment of people for whom this might be pretty bad news, now that i think about it. > 56% of Americans can't cover a $1,000 emergency expense For these folks (56% of the entire country), equity is one of the very few sources of cash if anything happens. If they even have it. Also, for the reckless subset of them, it's also a potential source of bling like iphones or maybe cars they couldn't afford otherwise. Both good and bad will have their life changed once the equity disappears. Note: clearly far from all 56% are homeowners, but googling "house poor" doesn't bring up numbers that are too much better.
  - cjbgkagh 4y ago
    I should have been clearer with the hypothetical; there is a value between zero and however much the property is underwater that people would be willing to pay to no longer be underwater. The max of that value is equal to how bad it is for that person. Being underwater is really bad and will be life destroying for many people, even if they never have to sell they will be far worse off on average than if they didn’t buy a house that lost value. Historically maxing out on debt and buying property has been a winning strategy, in such an environment those who are underwater simply have to wait to be bailed out by high inflation and loose monetary policy. In my view there is a lot of change in the economy and we’re going to see some new things we haven’t seen before.
boopboopbadoop 4y ago
This is the kind of thing a real estate agent will tell you before they suggest you raise your bid. The fact is that it does matter - you could have bought a better house with the difference, your monthly payments could have been lower, etc.
- boopboopbadoop 4y ago
  Recent homebuyers and real estate agents downvoting me

msufan 4y ago

Headline: "An alarming number of US homebuyers are underwater" Reality (deeper in the article): "The portion of underwater mortgages is still historically low..." We need to keep calling out clickbait titles for what they are.

Mistletoe 4y ago
https://fred.stlouisfed.org/series/MSPUS https://fred.stlouisfed.org/series/MSPUS It's difficult to be underwater when the curve looks like this. It would mean just buying extremely recently. Give it time. This recent jump was unprecedented. Q2 2020 322k Q3 2022 456k 34% in two years Closest analog is the jump before total meltdown in the 2008 housing crisis. Q3 2003 192k Q1 2007 257k 28.9% in four years This entire move was pretty much retraced in the following two years. Imagine the carnage if the most recent move retraced similarly.
- metaphor 4y ago
  Nominal terms may not be the best way to look at it. Here's a more intuitive visualization[1] of just how ridiculous the situation is. The at-a-glance takeaway is that those who bought anytime from 2021 and today are, on average, almost certainly holding an illiquid bag that's even more overvalued than the inflation-adjusted peak of the housing bubble leading into the GFC. The original Black Knight press release[2] cited by the article highlights: > Of all homes purchased with a mortgage in 2022, 8% are now at least marginally underwater and nearly 40% have less than 10% equity stakes in their home, a situation most concentrated among FHA/VA loans > More than 25% of 2022 FHA/VA purchase mortgage holders have now dipped into negative equity, with 80% having less than 10% equity In other words, low income and veteran home buyers. What I'd like to know is what percentage of these homes were financed with adjustable-rate mortgages...based on the implied trend, those people are liable to be sucking hind tit sooner than later. As for those with fixed-rate mortgages that are able to continue making payments, being underwater just means less future business for Black Knight...soon to be ICE's problem if/when the acquisition closes next year. [1] https://fred.stlouisfed.org/graph/?g=kYEb https://fred.stlouisfed.org/graph/?g=kYEb [2] https://www.blackknightinc.com/black-knights-october-2022-mortgage-monitor/ https://www.blackknightinc.com/black-knights-october-2022-mo...

bagels 4y ago

An alarming number -> an alarming number of recent buyers -> 250,000. Is that number alarming?

deleted 4y ago

[deleted]

rgmerk 4y ago

As I understand it. most of these borrowers are on fixed rate mortgages at very low interest rates. Furthermore, with the strong labor market their wages are likely going up in nominal terms, and furthermore their chances of losing their job and not being able to find another one are also low. Being underwater on a loan is never fun but these borrowers are in about as good a position as you could possibly be in while underwater.

nunez 4y ago

FUD. Mortgages are "underwater" because home prices are depressed due to the high interest rates.

CogitoCogito 4y ago
> Mortgages are "underwater" because home prices are depressed due to the high interest rates. So you mean to say that mortgages are underwater?

refurb 4y ago

I'm keeping an eye on Canada. They had barely a blip in 2008, and the same run up post-2008, so the average home sale price was 2x that of the US in 2021, despite no 30-year fixed mortgages (most float or are fixed for 5-years at most). During Covid prices were up 20-30% over those two years. Absolute insanity. The bank of Canada has increased interest rates from 0.25% during Covid to 4.25% with the latest increase this week. The economy isn't really slowing much, so a few more increases are likely next year. Plus Canada needs to keep up with the US interest rate or else their currency will depreciate which is great for exports, but crappy for imports (and thus inflation). Cracks are starting to show. In Toronto the outlying suburbs are down 20-35% in just the last 8 months (which bring them down to pre-Covid or slightly below). A ton of people took variable rate mortgages during Covid (30% last year) so each interest rate increase is increasing their monthly payments. It's not unusual to hear people say their $2000 mortgage is now $3800/month. All while home prices are dropping. It's going to be really interesting. I'm guessing a 2008 like correction (without the financial institution crisis like the US). Some areas will likely see 40%+ down from peak which will likely bring prices back to the early 2010's. Another problem is that most mortgages in Canada are recourse (except Alberta). So if you can't make payments, sell, and your proceeds don't cover the remaining mortgage, well the bank is coming after your other assets for the difference. Quite the situation.

vineyardmike 4y ago
> They had barely a blip in 2008, and the same run up post-2008, so the average home sale price was 2x that of the US in 2021 The general cost of housing is pretty bad in the US and it seems to be even worse in Canada. Beyond the risk of bankruptcy and underwater mortgages, I wonder how much longer its politically palatable to have housing this unaffordable - especially in Canada where it seems worse. I wonder what (if anything) the government will (be forced to) do to address this. Its often discussed how a generation of people (millennial) were basically all renters. Meanwhile, a lot of boomers seem to depend on the value of their house to aid them through retirement. Unless society finds a way to embrace renters as the new "American dream" (or Canadian, or whatever), it seems like there will be a major problem that will one day emerge.
- 4y ago