23 Percent of Mortgages Are “Upside Down”

A report commissioned by the Wall Street Journal and conducted by First American Core Logic estimates that 10.7 million residential mortgages, or about 23 percent are “upside down”–what is owed on the home in terms of debte is more than the market value of the home. The report is free, but requies a “subscription” to First American Core Logic’s news releases.

The results are not that surprising. In essence, if you bought at the height of the housing bubble (in 2005, 2006, or 2007) and you didn’t put much equity into the purchase, you’re probably upside down. Also not surprisingly, the distribution of negative equity (upside down mortgages) is concentrated in those states most effected by the bubble: Nevada has the highest percentage of negative equity mortgages (65 percent) followed by Arizona (48 percent), Florida (45 percent), Michigan (37 percent), and California (35 percent).

Michigan is particularly interesting because this wasn’t so much of a bubble state as an economic bust state. Analysts expect Michigan to lose nearly 1 million jobs by the end of the decade. But the dynamics are the same–incomes can’t support the value of the housing.

In addition, the report notes that most of the upside down mortgages were taken on new homes, not financing for existing homes. Condominiums also have higher shares of negative equity than single family homes as do investor-owned versus owner-occupied properties.

Many analysts are worried that this will encourge property owners to “walk away” from their mortgages because they don’t foresee the value of their homes ever recovering. Importantly, this is only a real problem if: 1) homeowners lose their source of income (unemployment) or 2) homeowners decide they have to sell in the short term. This is much more likely on investor-owned homes than owner-occupied homes.