An estimated 5.1 million U.S. homeowners are expected to owe more on their mortgages than their houses and apartments are worth by this June, according to a recent study by First American CoreLogic. Many of their properties are worth less than 75 percent of the debt they still owe.
According to First American, it would cost about $745 billion, slightly more than the size of the original 2008 bank bailout done by the Bush administration, to bring those underwater borrowers up to breakeven.
The administration has made no such proposal.
This hangover from the housing boom that had so much to do with causing the worst recession since the 1930s, has much more damage to do. Those 5.1 million homeowners whose debt exceeds their equity have two choices: they can continue to pour money into their properties or they can walk away. Choice number one means they are not building equity they can tap by refinancing. It may be years before the value of their house grows into the black again. The psychological impact will be huge. A very large percentage of them will cut back on spending. The investing they do for their retirement is likely to be conservative, which will slow the recovery.
Choice number two will also have dire consequences. The homeowners who hand their properties back to the mortgage holders will ruin their credit ratings and may find it difficult to buy another residential property, regardless of their incomes. Some will find that the mortgage contract they signed makes them liable for the unpaid balance after the mortgage holder sells the surrendered property. They are also very likely to fall into the conservative, small-spender category, and further dampen the economic corner where they are.
The anticipated flood of walk-aways also will throw tens of thousands of distressed properties on the market, pushing prices down and increasing the number of underwater mortgages. Banks and other lenders will have less to lend — and less interest in lending on residential real estate — further depressing the housing market.
THE UPSIDE to this picture, is that housing is 30 percent less expensive than it was four years ago, which means that today’s new buyers can move into a home of their own for that much less than the equivalent property (maybe the same property) sold for in 2006. These new buyers will be paying smaller mortgage payments, owe less for insurance and taxes and have more money to spend on other things.
Because the U.S. is a growing nation of about 306 million, the stock of bargain-basement residences will be sold. The market will clear. Building will flourish again.
Several tomorrows will pass before that golden day.
— Emerson Lynn, jr.
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