My print column this week examines a widely reported bellwether stat for the housing market, that roughly one in four American homeowners with debt on their homes owe more than their homes are worth — or, in popular parlance, are underwater. CoreLogic and Zillow.com both put the proportion at about 23% of homeowners in the third quarter of last year.
That figure is closer to 30%, according to Moody's Economy.com. Economy.com assesses the underwater problem differently than the other companies, taking on an entire housing market rather than assessing each home separately. If the sum of housing debt in a ZIP code is greater than that market's total value of mortgaged homes, every home in that ZIP is assumed to be underwater. "These are clearly rough estimates," said Mark Zandi, chief economist of Moody's Analytics. He said ideally he would wed his data sets to those of his competitors, which have their own weaknesses — CoreLogic, for instance, doesn't have enough coverage in several states to include them in some of its negative-equity estimates.
The other companies take a stab at estimating the value of each home with a mortgage, but these are rough calculations — fewer than half of Zillow's are within 10% of actual sales price. Are CoreLogic's automated valuation models "an imperfect tool for assessing home equity risk?" asked the company's chief economist, Mark Fleming. "Yes. But what's the alternative? Am I going to do an appraisal of 55 million homes? And those have biases, and human biases are more difficult to account for."
"Identifying the true value of a home is extremely difficult, and much more difficult than it used to be," said housing economist Tom Lawler. However, he noted, "If they used a different automated valuation model, would they come up with materially different numbers? Probably not."
While CoreLogic's mortgage numbers are based on more solid information than its value estimates, the company makes certain assumptions about how much of the mortgage principal has been paid, and how much of the home's equity lines of credit have been used. It adjusted these assumptions in 2009, resulting in a significant drop in the underwater estimates — from 33% beforehand to 23% afterward, in line with today's numbers.
Zillow assumes none of the mortgage principal has been repaid, that initial lines of credit are fully tapped and that no additional ones have been taken. Because the first two assumptions tend to inflate the underwater count, while the third tends to deflate it, the company hopes any errors largely cancel each other out. The alternative of making assumptions about each home, "becomes fairly tenuous," said Stan Humphries, Zillow's chief economist.
Some economists think the resulting numbers make sense. "Twenty to twenty-five percent of homes around the country being underwater, that's a reasonable number," said economist Jeff Thredgold of Vectra Bank Colorado.
To Zandi, this number of underwater homeowners is deeply troubling. "It goes to economic issues of labor mobility; it cuts down on the ability of people to move," Zandi said. "It has broad financial and macroeconomic implications." However, he acknowledged that many of the underwater homeowners — almost half, by his company's estimates; more than half, according to CoreLogic — have negative equity of less than 25%, and so are unlikely to strategically default. Plus, they could be lifted out of underwater territory by a housing turnaround. "If we get a little bit of house-price growth soon, this can change around very quickly," Zandi said.
Fleming said he "completely agrees" that only a subset of underwater homeowners, those deeply underwater, are at great risk of default. "We've said the same thing," he said.
One concern is that underwater rates may be even higher in the commercial market, according to Matthew Anderson, managing director of Foresight Analytics, who forecasts an increase from already high rates in coming years. "It's alarming," he said.
Blanche Evans, a real-estate consultant and author, said that residential underwater rates could be even higher if transaction costs were included. However, she thinks the problem may be overblown. "My concern with 'underwater mortgages' is that the term is scarier than it needs to be," Evans said. "My point is that it's normal for people to be underwater when they buy a home for a period of a few years, especially if they make low down payments. And where else do we worry about being underwater? We drive new cars off the lots everyday and cheerfully shrug off thousands of dollars in instant depreciation. We buy clothes that sell for pennies on the dollar in garage sales. We buy electronics that are obsolete as soon as we get them home. You certainly don't get equity when you rent, but most of the time, you get at least some, most, all or all plus more of your investment returned to you when you own a home. That's really pretty amazing when you think about it."
