John Rebchook is a former Rocky Mountain News reporter with more than 30 years of experience in writing and communications... The often-quoted statistic that almost one out of every four homes in the nation is underwater makes headlines, but it may to be making the housing market look worse than it is.
Carl Bialik, the “Numbers Guy” columnist at the Wall Street Journal, tackled this subject last weekend in a story titled Housing Statistics Hit Rough Waters. A home that is underwater is one whose mortgage is worth more than the value of the house.
Housing epidemic risk over-blown
Bialik writes that “in a rare instance of mild good news in the housing market, the 1-in-4 figure, and the fear it provokes, seem overblown. It is calculated using assumptions in ways that inflate the number of underwater homes. And more than half of these homes are underwater by a small margin, meaning that for various reasons those homes are unlikely to trigger an epidemic of defaults.”
He also notes that about a third of the homes in the U.S. are owned free and clear, while the negative equity numbers are reserved for homes with mortgages, obviously. In other words, if 22.5 percent of homes with mortgages are underwater, as CoreLogic recently reported, than only 15 percent of the homes in the country are in the same boat, when homes without mortgage are factored in.
Buyers remain conservatives
“It really hadn’t occurred to me that there are a lot of homes in the country that are owned free and clear,” said Jim Nussbaum, a broker with the Kentwood Co. Nussbaum thinks that Denver-area home sales in 2011 will be “pretty decent,” but he said buyers remain “very conservative” and do not want to over-extend themselves with excessive housing debt.
Lawrence Yun, the chief economist for the National Association of Realtors, when he was in the Denver-area recently, told InsideRealEstateNews that homeowners who are so underwater that they see no hope of ever recovering their initial investment, will be tempted to make a “strategic default” and stop paying their mortgage, even if they can afford it. But if the spread between what they owe and what is would sell for in the open market is not that much, they are much more likely to wait the market out until their home rises in value.
Trend is what counts
Lane Hornung, who has an engineering degree and a MBA in finance, is as much of a “numbers guy,” as the Journal’s Numbers Guy.
“Like any statistical data based on a model, the absolute number, the percentage of homeowners with negative equity, is probably not as important as the trend in the data,” said Hornung, president and co-founder of 8z Real Estate, a sponsor of InsideRealEstateNews. Hornung added he would be “curious” to know how each model is trending.
Hornung also pointed out that the “foundation of these models is an estimate of home values. By their own admission, Zillow’s estimate (mentioned in the Journal column) is off by more than 10 percent about half the time. That’s a pretty shaky foundation from which to extrapolate.”
Stephen Holben, owner of Holben Building Corp., has been questioning national statistics’ relevance for the Denver market for the past five years.
All real estate is local
“When I first started seeing the data from the (now semingly ubiquitous) housing data companies I was incredulous about how a reliable national perspective could be provided on such a localized industry, particularly when no one at these companies has ever laid eyes on any of the properties or know their condition or circumstances of a sale,” Holben said. “The more I studied these various reports the more it became clear that the data is far too homogenized to be of any value to a homeowner, and I began to see them as nothing more than convenient but not relevant stories for the media to read without having to do any investigation. I think this has lead to a much distorted view of Denver’s housing market than is reality.”
Denver, he continues, ”enjoys the quality of being one of the most desirable cities in the nation, and, like every major city has neighborhoods that are more desirable than others. Those neighborhoods have enjoyed stability; indeed the neighborhood I’m building in (Wellshire) has seen existing homes increase from between 40 percent and 100 percent since 2005. ”
Holben said that anyone in the housing market should not use national statistics as a road-map for what is happening in their neighborhood.
“The absolute only way home buyers and sellers can get an accurate idea of what a home is worth is from a valuation from a full time real estate practitioner using current arms-length sales,” according to Holben.
Hornung took it one step further.
“Bottom line, the only definitive way to establish an exact figure for homeowner equity, positive or negative, is at the time of closing,” Hornung said. “But these models can be helpful for trending analysis.”
Contact John Rebchook at JRCHOOK@gmail.com
[...] This post was mentioned on Twitter by Drew Schneider, John Rebchook. John Rebchook said: #Underwater loans, don'tt mean homes are drowning. #WSJ and other experts discuss the oft-quoted stats. http://ow.ly/3Ble1 [...]
“He also notes that about a third of the homes in the U.S. are owned free and clear, while the negative equity numbers are reserved for homes with mortgages, obviously. In other words, if 22.5 percent of homes with mortgages are underwater, as CoreLogic recently reported, than only 15 percent of the homes in the country are in the same boat, when homes without mortgage are factored in.”
No problem; only 1.5 houses in every block need a snorkel. Does it make you wonder what percentage of an economy can be bankrupt before it really makes a difference?