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Another major concern in 2008 was how little equity homeowners had in their property. If they had financed 100% of their loan, had exotic loans, or paid interes

Another major concern in 2008 was how little equity homeowners had in their property. If they had financed 100% of their loan, had exotic loans, or paid interest only, etc., then they weren't actually losing any money to walk away from a property. We're now seven years on, which means a hypothetical homeowner who financed 100% in 2008 may now hold about a 15% equity stake. That home could lose 15% of its value and the owner could still sell it to pay off their loan.

toomuchtodo 11y ago
http://www.calculatedriskblog.com/2015/03/zillow-negative-equity-rate-unchanged.html http://www.calculatedriskblog.com/2015/03/zillow-negative-eq... "In the fourth quarter of 2014, the U.S. negative equity rate – the percentage of all homeowners with a mortgage that are underwater, owing more on their home than it is worth – stood at 16.9 percent, unchanged from the third quarter. Negative equity had fallen quarter-over-quarter for ten straight quarters, or two-and-a-half years, prior to flattening out between Q3 and Q4 of last year. While this may not seem very notable (after all, overall negative equity didn’t go up, merely flattened out), this represents a major turning point in the housing market. The days in which rapid and fairly uniform home value appreciation contributed to steep drops in negative equity are behind us, and a new normal has arrived. Negative equity, while it may still fall in fits and spurts, is decidedly here to stay, and will impact the market for years to come. "
- cgearhart 11y ago
  The peak of negative equity was in 2012 [1], and it has since fallen to a level more on par with historic norms; chart 5 in [2] shows that pre-2004 vintage loans experienced mid-teens negative equity rates. Even so -- the raw percentage of homeowners experiencing negative equity is not a good predictor of the impact of raising interest rates and falling housing prices. Negative equity doesn't trigger a distressed mortgage, or force an owner to abandon the property. But positive equity does have an anchoring effect. [1] http://www.zillow.com/research/zillow-negative-equity-q3-2013-5801/ http://www.zillow.com/research/zillow-negative-equity-q3-201... [2]http://www.newyorkfed.org/research/epr/09v15n1/0907haug.pdf http://www.newyorkfed.org/research/epr/09v15n1/0907haug.pdf
  - toomuchtodo 11y ago
    > Negative equity doesn't trigger a distressed mortgage, or force an owner to abandon the property. Disagree. As soon as a property has negative equity, a homeowner begins to contemplate strategic default. As their property tips ever more into negative equity territory, the benefits of default rise dramatically, whether the mortgage is recourse or not. Don't take my word for it; the Federal Reserve did a study on it: "Our results suggest that while strategic default is fairly common among deeply underwater borrowers, borrowers do not ruthlessly exercise the default option at relatively low levels of negative equity. About half of defaults occurring when equity is below -50 percent are strategic but when negative equity is above -10 percent, we find that the combination of negative equity and liquidity shocks or life events drives default. Our results therefore lend support to both the “double-trigger” theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest." http://www.federalreserve.gov/pubs/feds/2010/201035/201035pap.pdf http://www.federalreserve.gov/pubs/feds/2010/201035/201035pa...
    - cgearhart 11y ago
      Your quote from the Federal Reserve directly supports my statement; it just quantifies that ~10% negative equity + a liquidity shock is a good predictor of default. Put another way, I was suggesting that there is hysteresis in the response to negative equity. That said, my statement would have been much less confusing if I had explicitly acknowledged the connection. Perhaps, "Negative equity doesn't immediately trigger a distressed mortgage, or..." Furthermore, my central claim -- that the total fraction of houses with negative equity is a poor predictor of default risk -- is unaffected either way. It would be more useful to know the distribution of negative equity for those houses, or summary statistics like the mean or median negative equity. (If we knew that the median negative equity were 10%, then we could predict that about half of the 16.9% of all properties that are upside down are at risk of default if they experience a liquidity shock.)
      - toomuchtodo 11y ago
        My mistake then! Here is more data. I believe anyone in the 100% to 120% LTV will stay current on their mortgage; anyone else above 120% LTV? Highly possible they'll default. From Zillow: "Nationally, of the homeowners who are underwater, around half are only underwater by 20 percent or less, which is to say they are close to escaping negative equity. (Figure 2) On the other hand, 1.9 percent of all owners with a mortgage remain deeply underwater, owing at least twice what their home is worth. Of the largest metro areas, markets with above average rates of deeply underwater homeowners include Las Vegas (3.8 percent), Chicago (3.8 percent), Atlanta (3.5 percent), Detroit (3.3 percent) and Miami (2.8 percent)" Almost half of the borrowers with negative equity have a LTV of 100% to 120% (8.2% in Q4 2014). Most of these borrowers are current on their mortgages - and they have probably either refinanced with HARP or their loans are well seasoned (most of these properties were purchased in the 2004 through 2006 period, so borrowers have been current for ten years or so). In a few years, these borrowers will have positive equity. The key concern is all those borrowers with LTVs above 140% (about 5.2% of properties with a mortgage according to Zillow). It will take many years to return to positive equity ... and a large percentage of these properties will eventually be distressed sales (short sales or foreclosures).

toomuchtodo 11y ago

http://www.calculatedriskblog.com/2015/03/zillow-negative-equity-rate-unchanged.html http://www.calculatedriskblog.com/2015/03/zillow-negative-eq... "In the fourth quarter of 2014, the U.S. negative equity rate – the percentage of all homeowners with a mortgage that are underwater, owing more on their home than it is worth – stood at 16.9 percent, unchanged from the third quarter. Negative equity had fallen quarter-over-quarter for ten straight quarters, or two-and-a-half years, prior to flattening out between Q3 and Q4 of last year. While this may not seem very notable (after all, overall negative equity didn’t go up, merely flattened out), this represents a major turning point in the housing market. The days in which rapid and fairly uniform home value appreciation contributed to steep drops in negative equity are behind us, and a new normal has arrived. Negative equity, while it may still fall in fits and spurts, is decidedly here to stay, and will impact the market for years to come. "

cgearhart 11y ago
The peak of negative equity was in 2012 [1], and it has since fallen to a level more on par with historic norms; chart 5 in [2] shows that pre-2004 vintage loans experienced mid-teens negative equity rates. Even so -- the raw percentage of homeowners experiencing negative equity is not a good predictor of the impact of raising interest rates and falling housing prices. Negative equity doesn't trigger a distressed mortgage, or force an owner to abandon the property. But positive equity does have an anchoring effect. [1] http://www.zillow.com/research/zillow-negative-equity-q3-2013-5801/ http://www.zillow.com/research/zillow-negative-equity-q3-201... [2]http://www.newyorkfed.org/research/epr/09v15n1/0907haug.pdf http://www.newyorkfed.org/research/epr/09v15n1/0907haug.pdf
- toomuchtodo 11y ago
  > Negative equity doesn't trigger a distressed mortgage, or force an owner to abandon the property. Disagree. As soon as a property has negative equity, a homeowner begins to contemplate strategic default. As their property tips ever more into negative equity territory, the benefits of default rise dramatically, whether the mortgage is recourse or not. Don't take my word for it; the Federal Reserve did a study on it: "Our results suggest that while strategic default is fairly common among deeply underwater borrowers, borrowers do not ruthlessly exercise the default option at relatively low levels of negative equity. About half of defaults occurring when equity is below -50 percent are strategic but when negative equity is above -10 percent, we find that the combination of negative equity and liquidity shocks or life events drives default. Our results therefore lend support to both the “double-trigger” theory of default and the view that mortgage borrowers exercise the implicit put option when it is in their interest." http://www.federalreserve.gov/pubs/feds/2010/201035/201035pap.pdf http://www.federalreserve.gov/pubs/feds/2010/201035/201035pa...
  - cgearhart 11y ago
    Your quote from the Federal Reserve directly supports my statement; it just quantifies that ~10% negative equity + a liquidity shock is a good predictor of default. Put another way, I was suggesting that there is hysteresis in the response to negative equity. That said, my statement would have been much less confusing if I had explicitly acknowledged the connection. Perhaps, "Negative equity doesn't immediately trigger a distressed mortgage, or..." Furthermore, my central claim -- that the total fraction of houses with negative equity is a poor predictor of default risk -- is unaffected either way. It would be more useful to know the distribution of negative equity for those houses, or summary statistics like the mean or median negative equity. (If we knew that the median negative equity were 10%, then we could predict that about half of the 16.9% of all properties that are upside down are at risk of default if they experience a liquidity shock.)
    - toomuchtodo 11y ago
      My mistake then! Here is more data. I believe anyone in the 100% to 120% LTV will stay current on their mortgage; anyone else above 120% LTV? Highly possible they'll default. From Zillow: "Nationally, of the homeowners who are underwater, around half are only underwater by 20 percent or less, which is to say they are close to escaping negative equity. (Figure 2) On the other hand, 1.9 percent of all owners with a mortgage remain deeply underwater, owing at least twice what their home is worth. Of the largest metro areas, markets with above average rates of deeply underwater homeowners include Las Vegas (3.8 percent), Chicago (3.8 percent), Atlanta (3.5 percent), Detroit (3.3 percent) and Miami (2.8 percent)" Almost half of the borrowers with negative equity have a LTV of 100% to 120% (8.2% in Q4 2014). Most of these borrowers are current on their mortgages - and they have probably either refinanced with HARP or their loans are well seasoned (most of these properties were purchased in the 2004 through 2006 period, so borrowers have been current for ten years or so). In a few years, these borrowers will have positive equity. The key concern is all those borrowers with LTVs above 140% (about 5.2% of properties with a mortgage according to Zillow). It will take many years to return to positive equity ... and a large percentage of these properties will eventually be distressed sales (short sales or foreclosures).