Good news: Fewer underwater mortgages

There's been a decline in the percentage of mortgage borrowers who owe more than their homes are worth.

EMAIL  |   PRINT  |   SHARE  |   RSS
 
google my aol my msn my yahoo! netvibes
Paste this link into your favorite RSS desktop reader
See all CNNMoney.com RSS FEEDS (close)
By Les Christie, CNNMoney.com

Housing: Best recovery bets
The average home price is forecast to plummet over the next two years. But these 7 cities are predicted to post gains.
Latest home prices: July – Sept. 2009
The national median home price fell 11.4% during the third quarter of 2009. Check how prices fared in your hometown.. More
Life after foreclosure
After losing their homes, these 4 families thought they'd never recover. They've found it difficult to rent and their credit is wrecked, but life is looking up.
Mortgage Rates
30 yr fixed 3.99%
15 yr fixed 3.06%
5/1 ARM 3.20%
30 yr refi 3.99%
15 yr refi 3.07%

Find personalized rates:
 

Rates provided by Bankrate.com.

NEW YORK (CNNMoney.com) -- Fewer people are underwater on their mortgages -- further evidence that the real estate free-fall may be slowing.

Just 21% of all single-family homeowners owe more on their mortgage balances than their homes are worth, according to a third quarter residential real estate report from Zillow.com. That is down from 23% at the end of the second quarter.

That is good news because it should help reduce the number of homeowners losing their homes to foreclosure. Being underwater is one of the two factors that lead to foreclosure, the other being, of course, not having enough income to make the monthly payments.

"The decline in the percentage of homeowners with negative equity is a positive sign and is directly attributable to the stabilization of home values from the second quarter to the third," said Zillow chief economist Stan Humphries.

But there's a second, less-positive factor that contributed to the reduction in underwater borrowers: foreclosures. So many people have already lost their homes that the ranks of those underwater is slowly dwindling.

And that highlights one of the most serious concerns that housing markets currently face. "Foreclosure rates," said Humphries, "are ramping up again."

Upswing

There are 1.2 million to 1.5 million seriously delinquent mortgages sitting out there like ticking time-bombs. These loans are at least 90 days late, and, historically, few borrowers who fall that far behind manage to start repaying.

Aggravating the foreclosure problem is the substantial numbers of option ARM loans that will reset over the next few months. These are loans with balances that have steadily increased because borrowers were permitted to make minimum monthly payments that did not even cover interest.

The resets will require borrowers to start paying down principal, and many will simply not be able to afford to do that.

Also resetting over the next several months will be many interest-only loans, which will also require borrowers to make much larger payments.

Another fear-factor for Humphries is that continued economic malaise will slow the housing market recovery. Recent macro-economic reports have been inconsistent. Good news came early in November, with the gross domestic product, growing at annualized rate of 3.5% during the third quarter.

A couple days later, however, the Labor Department reported the unemployment rate jumped to 10.2% in October. It's an understatement to say that losing a job can make it very difficult to pay off a mortgage.

Ghost hunting

Increased foreclosures also add to already long inventories. The National Association of Realtors reported there are 3.63 million homes on the market, a nearly eight-month supply at the current rates of sales. That's a two or three month oversupply, compared with a normal market.

But official inventory statistics may be undercounting; there is also the so-called "shadow inventory." For one, there are bank repossessions that have not been put back on the market. The banks have either fallen behind on processing these properties or they are reluctant to put REOs up for sale because the market is already overloaded.

The second element of the shadow inventory is that some individual owners would like to sell their homes but do not want to compete with foreclosures, which usually sell at a discount to market values. In many cities, foreclosures and short sales constitute the bulk of the market.

The housing market recovery will be affected by "how quickly these foreclosures transition back onto the marketplace," said Humphries.

Nationally, 21.4% of all sales were REOs, the industry term for bank-owned properties.

High as that rate is, that pales in comparison with some of the worst-hit metro areas. In Merced Calif., for example, 74.2% of all single-family home sales were of foreclosed properties; in nearby Stockton, the rate was 68.7%; and El Centro, down near the Mexican border, the rate was 68.1%.

The good news is that, in many areas at least, foreclosures are selling off quite quickly. The trouble is that, like Alice, who had to run to stay in place in "Through the Looking Glass," REO sales will have to increase at a blistering pace just to keep up with the new inventory coming onto the market.

That could put a damper on home prices for many months to come. To top of page

Find mortgage rates in your area


Features
They're hiring!These Fortune 100 employers have at least 350 openings each. What are they looking for in a new hire? More
If the Fortune 500 were a country...It would be the world's second-biggest economy. See how big companies' sales stack up against GDP over the past decade. More
Sponsored By:
More Galleries
Want to buy -- and live in -- a piece of history? It's not that far out of reach. These historic homes are not only for sale, they are incredible bargains. More
5 ways retailers are tracking you If you think pesky salespeople are invading your personal space, check out these 5 technologies that are tracking your movements throughout a store. More
Moto X vs. Droid Turbo: Which Droid should you buy? Motorola has made the two best Android smartphones this year. Here's how they stack up. More
Worry about the hackers you don't know 
Crime syndicates and government organizations pose a much greater cyber threat than renegade hacker groups like Anonymous. Play
GE CEO: Bringing jobs back to the U.S. 
Jeff Immelt says the U.S. is a cost competitive market for advanced manufacturing and that GE is bringing jobs back from Mexico. Play
Hamster wheel and wedgie-powered transit 
Red Bull Creation challenges hackers and engineers to invent new modes of transportation. Play

Most stock quote data provided by BATS. Market indices are shown in real time, except for the DJIA, which is delayed by two minutes. All times are ET. Disclaimer.

Morningstar: © 2014 Morningstar, Inc. All Rights Reserved.

Factset: FactSet Research Systems Inc. 2014. All rights reserved.

Chicago Mercantile Association: Certain market data is the property of Chicago Mercantile Exchange Inc. and its licensors. All rights reserved.

Dow Jones: The Dow Jones branded indices are proprietary to and are calculated, distributed and marketed by DJI Opco, a subsidiary of S&P Dow Jones Indices LLC and have been licensed for use to S&P Opco, LLC and CNN. Standard & Poor's and S&P are registered trademarks of Standard & Poor’s Financial Services LLC and Dow Jones is a registered trademark of Dow Jones Trademark Holdings LLC. All content of the Dow Jones branded indices © S&P Dow Jones Indices LLC 2014 and/or its affiliates.