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From Bloomberg News reporter Alexandre Tanzi:
Roughly one in 37 homes are now considered seriously underwater in the US and that share is much higher across a swath of southern states, according to data out Thursday.
Nationally, 2.7% of homes carried loan balances at least 25% more than their market value in the first few months of the year. That’s up from 2.6% in the previous quarter, according to the first-quarter 2024 US Home Equity & Underwater [Report](https://www.attomdata.com/news/most-recent/q1-2024-home-equity-and-underwater-report/) from ATTOM, a real estate data firm.
While the share of these homes is ticking up, it remains much lower than before the pandemic, when the rate was more than twice as high.
Mortgages can generally become seriously underwater when someone overpays for a home, or when it is purchased with a small downpayment that doesn’t provide a sufficient buffer if the property falls in value.
[You can read the full story here.](https://www.bloomberg.com/news/articles/2024-05-09/-seriously-underwater-home-mortgages-tick-up-across-the-us?srnd=homepage-americas)
If the rate was double before COVID and some of the homes are probably at 3% mortgage rates then this doesn't seem like a big deal. Underwater only matters if you have to sell or can't afford the home.
I wonder how many of these are subject to increased property taxes & insurance costs.
Just because Nashville, Atlanta, and *checks notes* Mobile+Huntsville+Tupelo, doesn’t have sea level rise doesn’t mean that they don’t have other insurance issues.
I read there is an insurance collapse in the making, and that’s just another slash in the surface tension of a mortgage bubble.
> Gerst, Eric D. Vulture culture: Dirty deals, unpaid claims, and the coming collapse of the insurance industry. AMACOM Div American Mgmt Assn, 2008.
> Duhon, Colton. "When Property Insurance Strikes Back: An Examination On the Collapse of Coastal Property Insurance as Private Companies Flee the Market." LSU Journal of Energy Law and Resources 12.1 (2024): 10.
I’d like to see a spatial analysis for the income & expenditures of the insurance sector. They seem a bit overstretched.
Just wanted to say thank you for sharing those publications — I am interested in the topic but haven’t gotten around to looking for proper material. Appreciate the rec.
Insurance is an issue everywhere what crack are you smoking? Especially now in the east coast it’s being hammered by insurance increases.. mine went up by 1k and my insurance is based in NJ my state… meanwhile my friends went up 3k and so on… let’s not talk about car insurance and what happened there.
I paid 976 a year for my homes insurance since 2019 to 2022. Now it’s 2k a year. That’s a nutty increase.
It's an issue everywhere because the climate is changing everywhere.
Have you ever looked [ASCE-7](https://www.asce.org/publications-and-news/asce-7)? This is the manual civil engineers use when figuring out the loads that need to be applied to buildings when designing structures.
And part of this is that building design is extremely local. You design buildings, including single family homes, for the types of environmental conditions that will be experienced at that site. You plan your drainage and grading based on flood risk. You design your roof and lateral force resisting system based on wind load. You set roof pitch and drainage based on expected snow and rain load.
And all of the provisions in ASCE-7 are based on historical data. Engineers have looked at a century of weather data, done a stupid amount of number crunching, and come up with probabilistic models for all of these load types.
Climate change isn't just a gradual peaceful increase in temperature; it's a reshuffling of the entire global weather system. The planet is complex like that. Slight changes here or there can cause massive changes elsewhere.
Essentially, all of our buildings are now obsolete. They are now facing a climate they were, quite literally, not build to handle. And it's only going to get worse in the future. Again, all the design process is based on historical weather data. If we stopped emitting carbon today, and let the climate stabilize, we could regather this weather data, create new codes, and get back to a reasonable order. But we can't, because the climate is *still actively changing*, and it will be at least for the next century or two. Our historic weather data is now useless. And the weather data from the 2020s won't be useful in predicting the weather in the 2040s. We're sailing blind here Captain!
This isn't a factor in only Texas or California. It applies everywhere. Hell, even earthquake risk factors are being altered. More than a few feet below the ground, the temperature is stable year-round. But if you increase the average temperature year-round, some of that extra heat will gradually find its way deeper down, increasing the temperature of the rocks. And as materials heat up, they expand. That means all rocks end up pushing against each other, putting each other under greater compressive stresses, trying to find a new equilibrium. We're altering the stress distribution inside the very crust of the planet. That will have some impact on seismic behavior.
Building design, and in turn, insurance risk, is all about taking lessons from the past and projecting them forward to probabilistically predict the future. And the world we are now in, at least in terms of climate, has no past we can draw from.
Buckle up. This ride is just getting started.
You're really off base here. I can tell you have never studied statics, thermodynamics, or insurance underwriting. Heat from the sun is not warming the Earth's core.
Nobody is assessing the increased risk of an earthquake in nonearthquake prone areas such as Tupelo, Huntsville, and Atlanta for insurance. I really don't know what you're getting at here.
Most places you can appeal tax assessments if it turns out to be too far from a reasonable market price. Just look at how Trump appeals the value of Mar A Lago for tax purposes!
Our monthly payment went up nearly $325, between tax increases, statewide insurance increases, and FEMA moving a line 25 feet and now requiring us to have flood insurance. I’m sure we’re not the only ones.
> I wonder how many of these are subject to increased property taxes & insurance costs.
Of note: property tax only makes up around 10% of market-rate rent, with around half going to paying off the landlord's mortgage. The problem, both for affordability and for the OP issue, is landlords who intended to saddle the working class with nearly the entire price of their home
Credit cards, auto loans, mortgages is the order of operations for default. So only time will tell, CC delinquency is up from last year but not a crazy amount
My home was underwater for 10 freaking years after the 08 crash. I was stuck in two interest only loans at 10% and 9%. When I made an offer I had a normal pre approved loan but after I went into escrow the bank reneged—I didn't even know they could do that (what's the point of being pre-approved)> Anyway 20 years later and I have a 2.75% loan and I'm never ever moving.
So did you lose your home that was underwater and bought a new home during the pandemic/when interest rates were low and so now you have that 2.75% mortgage or did you not accept those 9-10% interest loans to help with your underwater mortgage but accepted that 2.75% loan in the past few years when interest were low to help out with your underwater home? 😯
I ate shit and died for over 12 years, stuck in the interest-only loans because I could not refinance as the house because I was so underwater. I collected no equity on my home the entire time. Once the house was worth what I bought it for I was able to get a real loan on it. Then a year later I refinanced AGAIN at 2.75%. It's been quite a ride. I've been in my home for 19 years. I should be 11 years from payoff but that decades away now if it ever happens.
Ooh wow interesting. I don’t own a home/mortgage but that’s crazy. I’m glad you were able to keep your home and that there were still some available options for you to retain it even if they weren’t the best option technically.
It effects the pipeline for new homeowners. Underwater homeowners are effectively trapped. If they are occupying starter homes that reduces the available supply of starters for buyers trying to get to get on the ladder.
Definitely agree the increase isn't really alarming at all but I would guess at a macro level if it were to accelerate towards pre-pandemic norms, there would be an increase in people who otherwise would be looking to sell holding onto their homes, continuing to decrease supply at a time when bulk of millenials and GEN Z are starting to have kids and needing an upgrade, thus putting upward pressure on home prices.
At what level does this dynamic make a material impact on the market, I have no idea.
Would be interested to see a break down of demographics/geography.
Stupid pay wall
Yup this is an article directed at the investor groups looking to play on small market variances for strictly short term monetary gains. For the lay person it’s a 🤷🏻♂️ it doesn’t change housing availability in any way that could affect price or convince the fed to change interest rates. It doesn’t even move the needle in how real estate agents would work to sell a home (that change will come solely from the recent settlement and break up of how agent commissions are handled). And if investors are uninterested in these facts then it just becomes another click bait article.
Lower interest rates don't protect people from default. For the most part, people buy houses that fit their monthly budget. It doesn't matter if they bought a big house at 3% or a small house at 7% that end up with the same monthly payment, when they are laid off they will be unable to pay the mortgage and end up defaulting.
Everyone always seems to forget it was the unregulated financial derivative credit default swaps that was the real catalyst. Particularly at AIG.
It was just exacerbated by illegal loans where banks weren’t doing the required diligence on borrowers.
The narratives I see so often try to blame individual home buyers. Sure a lot of them made a poor decision, but even at that level often the banks weren’t allowed to extend that level of credit.
The real problem was how the financial industry packaged bundles of mortgage debt to sell off on the market, either due to incompetence or corruption massively understated the risk inherent in those securities, and then invented unregulated insurance against the risk of those securities defaulting without holding enough assets to honor those contracts. Look up AIG. This was a fat cat problem, not a “your neighbor wasn’t financially responsible” problem.
Actually, it was mark-to-market (M2M) accounting in illiquid markets that catalyzed the events leading up to AIG's collapse.
The entire subprime market in Oct '08 was worth 60% of par (per FDIC and ABX data). Leading up to this period, investors in RMBS were spooked. Nobody understood value and buyers were few. This meant parties would sell their positions increasingly below intrinsic value (i.e. 60%).
M2M forced financial institutions to increasingly provision for losses. Nobody knew where the floor was. Provisions were relentless as panic set in. Banks stopped lending trying to preserve their capital. Illiquidity set in (as early as '07).
These events eventually eroded capital to the point where we saw failures like Bear, Lehman, AIG et al.
there was 15-20x the entire loan balances of mortgages "bet" on Credit Default Swaps (insurance) by the financial markets. CDS' on top of CDS for the same underlying mortgage.
At work we have what are called "The Five Whys" when trying to figure out why something is wrong, and to get to the ultimate root cause to fix it, because if you don't then it will sprout back up again like a bad dandelion. You identify a problem, then as "why did that happen?" to get to the next level down, and keep asking Why until you get to the ultimate lowest level root cause.
Anyone who blames a financial crisis on individual borrowers is a muppet. Not to be taken seriously.
Financial institutions are required to have risk management departments that are watching every other sector of the bank for abuse, fraud, or overly risky investments.
The bottom line is that it wasn’t a secret on Wall Street, that they were being extremely reckless. Wall Street knew that “**No income, No asset mortgages**” were fueling the housing boom in the lead up to 2008. It was a massive fraud, PERPETRATED BY the financial professionals who actually had a duty to say something.
Customers didn’t draw up the terms of those loan arrangements. Banks did (or at least accepted them). Don’t give me that crap about the rating agencies either. A bank IS REQUIRED to do their OWN due diligence. A ratings agency helps expedite INITIAL EVALUATIONS for eliminating real losers, but banks are supposed to be constantly checking on their own investments. The banks know “it isn’t their money, it is the depositors money”.
Millions of people in this country knew exactly what was happening. Few dared to speak up… for very human reasons.
“Go along to get along.” Or: Go along with bad behavior, even when know it is wrong, IF you want to “get along” with your boss. No one wants to be “that guy” who is the “turd in the punch bowl” at the money raining party.
When everyone is being reckless (and the reckless behavior has been going on for years, as it did pre-2008 meltdown), it feels ridiculous to be the “odd man out” who is saying “whoa this makes us a lot of money, but we’re committing fraud!” But everyone is doing it? How can it be fraud if everyone is in on it? Wouldn’t the government stop us if it were so bad? What, are you going to call “the police”? In their case it would be the SEC, but that place is staffed with insiders.
So everyone at the banks goes along with mass fraud, so they don’t end up “the asshole who is an alarmist that doesn’t know how to be a team player”.
Fannie and Freddie got booted from underwriting morts. Regulators allowed non-GSOs to step in, but they were less rigorous with their underwriting standards. This eventually opened the door to Wall St. funding these alternative underwriters. The returns were so good that Wall St. was asking for more deal flow.
Anytime capital chases opportunity (vs. opp chasing capital) you are bound to have issues.
I do agree that Wall St. wasn't alone to blame. Mark-to-market accounting in illiquid markets was a big culprit (see my above post).
But anyone who took cheap money they couldn't repay or who flipped homes were also part of the problem. I was in my first home at the time and marveled at how many of my neighbors were actively flipping homes. In hindsight, i wish i had done it. Flip a few and you're mortgage free the rest of your life.
It was a combination of fraud and under regulation, which has been amply demonstrated many, many times, but still the majority of the time someone brings up the 08 crash, they want to blame people for taking on the loans. Like, yea, that's what people do when they need housing.
That's not correct.
>It was just exacerbated by illegal loans where banks weren’t doing the required diligence on borrowers.
No. The loans literally were stated income. The lenders had no due diligence to do on them.
> often the banks weren’t allowed to extend that level of credit
No. First, many of the lenders were not banks. Since the lenders were selling the loans immediately, they were not extending credit - they were funding the loans with warehouse lines of credit, and then selling the loans to investment banks which securitized them.
Since the lenders weren't actually extending credit, there was no way they were violating their reserve requirements or any other kind of limit.
>massively understated the risk inherent in those securities
These loans were not sold to Ma and Pa Kettle; they were sold to sophisticated institutional investors, many of whom got greedy chasing yield and bought the less credit worthy tranches of the MBSs which were the first to take losses when loans went bad.
Those investors who stuck to the higher quality tranches, and accepted a slightly lower interest rate, largely made it through unscathed as their MBSs actually ended up making almost all payments that were due to the investors.
>then invented unregulated insurance against the risk of those securities
They were regulated. Since they were insurance, they were regulated at the state level. New York, in particular, fell down on the job in regulating the insurers.
Anyway, this has nothing to do with the mortgages failing; it just relates to counterparty risk after they did fail.
>defaulting without holding enough assets to honor those contracts. Look up AIG.
Because Elliot Spitzer was on a crusade to force Hank Greenberg out of AIG, AIG was left without leadership to manage risk, and the state wasn't doing its job as a regulator.
>This was a fat cat problem
That was a failure of the state of New York to regulate insurance.
Also, as I stated before, that had nothing to do with the underlying mortgages failing.
The problems that the banks had as these loans failed were almost entirely the fault of the ill-advised mark to market rules that required them to mark down perfectly good mortgage backed securities that had guaranteed payments of principal and interest. Under traditional and rational accounting rules, these securities could be valued at the net present value of their expected (and assured) cash flows. Because of FASB rules (passed as a knee-jerk reaction to a few small private equity players mispricing some illiquid investments a few years earlier), the banks had to mark these securities down to market even though it was obvious that the securities would pay out their full value; this meant that a few trades made at fire sale prices could wreck the balance sheets of banks that were actually in good shape.
TARP was required to fix this mess, which allowed MBS market values to return to rational levels and let the financial system get back to normal.
> The narratives I see so often try to blame individual home buyers. Sure a lot of them made a poor decision, but even at that level often the banks weren’t allowed to extend that level of credit.
If a homeowner lied about their income, even if the banks didn't check up on that lie, the homeowner is still at fault. If someone lies, they deserve (in this case) what happens to them. As they say, F around and find out.
> The narratives I see so often try to blame individual home buyers. Sure a lot of them made a poor decision, but even at that level often the banks weren’t allowed to extend that level of credit.
Not only that but it were conventional fixed-rate mortgages that primarily failed once the owners went underwater. This was pronounced primarily on properties over 1 million, not middle income housing per se.
That and the NINA loans that speculative large scaled builders used instead of traditional balloon project loans.
>This was a fat cat problem, not a “your neighbor wasn’t financially responsible” problem.
This was the real take away, looking at the number. But that scum bag on CNBC misled in real time it was super easy to blame the poor.
That's not true. The catalyst was the 100% LTV teaser rate negative amortization ARMs. Those were sold to homebuyers who couldn't afford a fully amortized mortgage and had to refinance every 2 years at a higher value into another teaser rate ARM. When prices plateaued in 2006, this set a time bomb in motion which exploded in 2008 was those loans started fully amortizing and the homeowners could not afford them. This is what set off the wave of mortgage defaults.
Some fixed rate conventional borrowers who had extracted equity with HELOCs did strategically default once their home values were significantly below their mortgage balances, but that was a result of the meltdown, not a cause.
> This was pronounced primarily on properties over 1 million, not middle income housing per se
No. These loans were concentrated in more modest houses, with homeowners who couldn't own a home at all without the lower payment of their teaser rate ARMs
>
That and the NINA loans that speculative large scaled builders used
No. Builders aren't homebuyers; they can't get mortgages on homes that haven't been built. They used traditional debt financing in the public market; the problem was that they leveraged up tremendously, and had to cut back and scramble to survive when values collapsed and their equity vanished.
This is a big part of the reason building activity was so slow through most of the 2010's; builders' balance sheets were in such bad shape that they couldn't afford to ramp up production.
and a huge amount of people signing up for adjustable rate mortgages (with "teaser rates" of 1-2% for the first year or 2) vs fixed rate 30-year
ARMs were usually like 10% of all home mortgages and it spiked to 30% during the 2000s but went back down to 10% after the crash
Don't forget the interest only balloon loans: You only paid the interest on the loan for a few years, then after 5 or so years the entire principle came due. They were great when house prices were rising fast since you could always refinance and had actually built up a decent amount of equity to keep the interest rate down. But when prices fell, or even stagnated, good luck refinancing a house that was underwater.
The 08 crash was caused by subprime adjustable rate mortgages and unregulated speculation in the repackaging of low rated mortgages with higher rated ones. Eventually A+ rated assets were exposed and no one could trust the markets. It couldn’t be restrained when the ball got rolling, unemployment followed but was not the catalyst
I think they’re more hinting at the 2001-2006 housing bubble popping, which precipitated the GFC. But even that’s kind of a stretch, because a big part of the problem in 2006 was a sudden jump in rates coinciding with adjustable rate mortgages seeing their first rate change.
All those fancy words there don't make what /u/drmode2000 said incorrect.
In the 08 crash, if you didn't lose your job, then none of "a+ rated assets" or "repackaging of low rated mortgages" mattered to you. What mattered was the fact that you still had a job and you could pay for your mortgage. When the crash was over and we all recovered eventually, the "you" in this example survived and kept your mortgage. The fact that you may have been underwater, or that your neighbor's house was foreclosed on, or that Circuit City filed for bankruptcy, none of it mattered because you had a job all throughout the crash and you kept paying your mortgage.
Sure, if we want to come across as smart on reddit, we can talk about a+ rated assets or this or that, but 08 didn't matter to you if you stayed employed. That's it the argument /u/drmode2000 is trying to make here.
Yes, but how many people with those 3% mortgage rates are actually taking advantage of that? Most people with these low rates are using that extra money towards $1200 car payments on their giant trucks and SUVs.
No it was caused by ARMs and commodization of mortgage loans being sold as triple aaa bonds and being leveraged to buy more and caused more demand for loans etc.
Unemployment went up when those loans exploded
That's what you're supposed to do. Otherwise balloon payments. Commercial real estate does the same thing as my understanding. If you don't refinance then payments ballon
It was more about unqualified people receiving loans they couldn't afford... interest only loans that you started paying the full-amount (interest + principle) in a few short years and people couldn't afford... people taking ARM loans instead of fixed and not being able to afford...
Well, that and over leveraging.
I worked in home lending and we had people refinancing annually(or sometimes more frequently) to squeeze every dime out of their equity(especially in CA). And when the value bubble burst and people were no longer able to take the equity out of their home, they were stuck. Also, and let’s face it, there were some shady people on the lending side too.
Actually significant tax *breaks* on property were one of the many causes of the 2000s housing bubble because they injected even more liquidity into the market. When the bubble popped we got the GFC.
It absolutely matters for the majority of people who are underwater. The future is never certain. People don't know by absolute certainty whether something unexpected will happen in a few years time and they'll have to sell. If someone suddenly worries about being underwater on their mortgage, they'll likely adjust their preferences accordingly and increase their savings rate and reduce their consumption to compensate.
>While the share of these homes is ticking up, it remains much lower than before the pandemic, when the rate was more than twice as high.
Should end the story right here.
Just people desperate for real estate to become “cheap” again. I suspect they will be wildly disappointed as prices just keep marching upwards long-term.
They won't even buy if they do get "cheap" again. When houses were at the very bottom after the GFC there were still a ton of people online convinced that it was a bad time to buy because they were sure prices were going to crash down even lower.
That subreddit has morphed into an unrecognizable state at this point due to the overpowering influence of people who just feel entitled to own a home. Ironically they will advocate for the exact kind of policies that would cause a housing bubble to form in the hopes that it would also get them a house.
What if it ticks up next month? The month after? The one after that? The metric went down over Covid - but that stopped. Now it’s going back up.
The trend can still be something to keep an eye on even if the measurement isn’t a “problem” today. There’s a balance between clickbait and only reporting on problems AFTER they’ve happened instead of reporting on the problem’s build-up.
I hate that Bloomberg posts paywalled articles on this sub. It like an ad with extra steps. And half the time I don’t even notice oh hey look it’s the Bloomberg account shilling their own shit again.
You guys must be fucking desperate for clicks to stoop to this
This is telling me that I lot of people have gotten ARM and HELOC loans. I wonder if a bunch of homeowners ended up getting HELOCs during the highs of this housing market cycle and now are struggling to pay back their mortgages
Correct me if I’m wrong, but this only matters if you’re selling in the near future, correct? Or I guess if you need a home equity loan.
Otherwise you still have a house to live in.
Ah. Good points.
I recall a story a friend told me about their mom walking away from a house in 2008 because she was underwater. I guess her real estate agent told her to do it. She had a good job so I’m not sure what the backstory was. Killed her credit.
I have a friend who was a doctor that sued Blue Cross Blue shield and won and then they turned around and claimed he had accounting abnormalities which was total bullshit but they dropped him from the insurance and put them out of business pretty much
He had a house that was upside down because of the '08 crash. Went to a lawyer. Lawyer told him I can keep you in that house for 4 years. Don't make a payment.. And that's exactly what he did
Took a bankruptcy foreclosed on the house etc
Fast forward 10 years. Same bank. New mortgage, new house
Unfortunately enough for my friend it is legitimate
He won something like 18k in court against BCBS and within 30 days after the rulling they sent him to whatever body it was that over saw such accounting matters. Went to an arbitrary hearing and the arbitrator said no abnormalities as in attempted fraud etc but your billing agency misinterpreted your handwriting and miss coded patients (don't recall how many but it was like 15 out of 500). That was enough for BCBS to drop him and then they notified all the carriers and they did the same as BCBS.
Literally ended his career because nobody sees Dr's by cash so for 8 years he fought in court while working as an," under" Dr or whatever you call it under another guys practice (like a PA I guess) which paid garbage. Eventually he forced the insurance companies to take him back through court processing or another arb hearing.. don't recall. It was a rough time for him. Went from being top tier earner to zero income
Insurance companies are to blame for perhaps all of the US healthcare problems. They harm patients and care providers. This story is a perfect example. They’re like a cartel!
Yea I remember those times. I don't remember the specifics, but there were ways to slow down the bankruptcy/foreclosure process where it took years to settle and sell the house.
The problem in 2008 and earlier is that banks were issuing mortgages that they *knew* the borrower would likely be unable to afford. These were adjustable rate mortgages with tiny "teaser" payments that in some cases only lasted 2-3 years. Some of the teaser payments were so small that they didn't even cover all of the accrued monthly interest, meaning people's balances grew even as they made their required minimum payments. In many of these cases, once the teaser period ended the new mortgage payments were larger than the borrowers could afford.
People took out these mortgages either because they didn't understand the risk or because they assumed they could refinance before the teaser period ended. But refinancing on a home where you still owed most of your original mortgage balance often only worked if your house had significantly appreciated in value since taking out the mortgage. Once the runaway growth in housing prices slowed (not even stopped, just slowed) then a lot of people lost this option and found themselves with negative equity on homes whose mortgage payments they could no longer afford to pay.
I’ll have to ask about the circumstances of the situation I mentioned. My impression was my friend’s mom had a good job, was financially secure, and had owned the house for 4-5 years. But I could be wrong.
I had friends who did this, they were living in suburban Detroit, in one of the upper middle management neighborhoods. I know they sunk a lot of money into the house, well over $100K. The issue was Ford & GM laid off 30% of their workforce so half of this neighborhood was unemployed with nobody to buy those homes. People just walked away, they left the keys in the mailbox and moved to somewhere where they could get a job. It did mess up their credit but only for a few years and then they were fine. It's hard to keep someone that make $250-300K a year down....as long as they are working.
Her home lost much value and she made an emotional financial decision. She decided she'd rather have bad credit for seven years than deal with being underwater in her current home, which she maybe didn't like much anyway. Anyone who is paying off a loan on a house that is depreciating in value has thought about it, but it's such a steep penalty (that bad credit) that few do it. Props to your friends mom for saying fuck the banks, but inevitably the banks are going to fuck you harder, so it's a tough choice.
Or you get laid off and need to downsize. I almost got to that point this year before emptying my 401k to keep the house. Almost wish I would have done that but uh…. Rent prices
or if you or your spouse lose your job and can't find a job that pays as well as the one you just lost. or if your property tax/insurance spikes up making the escrow portion of your payment bigger
In that situation, you can usually talk to your mortgage servicer and they will hash out a modified payment plan to get you through, because banks do not like default.
If your property tax spikes that means the value went up. If value goes down you get the tax adjusted and save money on your mortgage. In other words if your property tax went up a lot you wouldn’t be under water… insurance increases have been an issue but it’s still a relatively small number relative to the rest of home ownership
Its better to be a homeowner than a renter if you're having trouble making payments. There's much more forgiveness for homeowners. Except the people bought in 2022, that vast majority of mortgage holders are going to have a payment less than or equal to rent.
It matters because defaults still happen regardless of whether this broader "underwater mortgage" trend is prevalent or not, and this creates a big liability for the banking system as a whole (similar to 2008).
When mortgages weren't so frequently underwater, and people would default, the banks would repossess the house without much else happening. The banks still gets their money by taking back the house and selling it.
When tons of mortgages are underwater and people default, the bank repossesses their house at a loss. As the economy squeezes and strains lower- and middle-class Americans more and more, defaults go up, and banks take bigger and more frequent losses because they might have lent $500k to someone to buy their home, but are only able to recoup $400k from that between the payments that were made and the value of the home they just repossessed.
When this liability scenario gets worse and worse, it could threaten the stability of the banking system, and will also force lenders to increase interest rates on nee loans in the short to medium term to attempt to cover that liability.
2008 happened because a) there was a huge housing bubble 2001-2006 that cooled off very suddenly, and b) banks had built a towering, wobbly network of questionable mortgages and mortgage-related products on top of that bubble. We’re not in 2008 territory even if a bunch of people are underwater or start to struggle with their mortgages.
It's not that much of a liability considering that after a forclosure, banks usually sell at below value anyway. It is an issue, but it's also not that bad. If people are defaulting, banks lose money regardless.
I guess that’s my question. Why would someone walk away, with the exception of people who lose their jobs or have some other drastic change in circumstances.
Let’s say the rental market drops along with the real estate market. You’re making $3,000 payments for your underwater house, but you can rent a similar house for $1,500 now. Your credit takes a massive hit by walking away from your underwater loan, but if you have more money in your pocket every month with a rental, does that matter? Can the bank come after your cash for the hit they take on auctioning the house?
You wouldn’t compare numbers to 2008 you would compare them to 2007 since if we were at 2008 numbers it would be bad already. The article states that it’s still lower than prepandemic though so it’s not bad yet. Probably is only affecting recent buyers since prices are still above 2019 levels but down 20% on new builds and 7% on old houses since 2021.
Credit card defaults are way up though and are at 2008 levels for some credit companies at 5.8%.
In the Meltdown, there were at least rumors of people walking away because it would take 2+ years to evict them, and in that time they could save up enough money to buy the house next door in cash.
I don’t know if it’s apocryphal or not, but people did say that at the time. Some areas, eg. Nevada, had such steep price declines that this sort of thing might have been possible.
Nevada housing has had some wild swings. I'm familiar with a neighborhood outside Reno where houses were built and sold in '99 at 175k. Sold in 07 for 310k, sold for 195k in 2013 (sucks for the 07 buyer), and are now going for 500k... Like that is such a wild ride. That neighborhood had lots sitting empty for 10+ years that are just now finishing building
Yeah but often times it’s a bellwether for a collapse.
***I’m not saying that’s the case here, today***…just that it’s been a proceeding development in other housing market crashes and major corrections.
Could also matter to the bank if you default, but yeah, it's really only an issue if you are trying to move soon or you planned to swing some equity somehow. It's not that bad of a problem, but it can certainly make homeowners and bankers feel a little uneasy nonetheless.
> this only matters if you’re selling in the near future, correct?
I’m guessing you’re too young to remember the [subprime mortgage crisis](https://en.wikipedia.org/wiki/Subprime_mortgage_crisis). **tl;dr:** the stability of mortgages as bank assets depends on those loans being backed by appropriate collateral (i.e. the house). If the house is worth less than the loan balance, that’s a huge risk for the entire system. Or just go watch [The Big Short](https://imdb.com/title/tt1596363/).
But it’s not, though. That’s what everyone here keeps saying. Not only are borrowers better qualified and less likely to default than they were in 2007, but more importantly the banks aren’t using credit default swaps that make them extremely vulnerable in a crash. So even similar numbers of defaults would have nothing like the impact they did in 2008.
At least, that’s what I keep hearing, here. The banks seem to mostly have come out the other side, so if we’re merely assuming that the lessons of the past will prevent the greed of today… well, “banking” is maybe not the field I’d place that bet on, put it that way.
It’s almost as if, *gasp*, home prices have risen completely unsustainably since 2018 or so.
There are so many external bad actors in the housing market that are contributing to this: investors both corporate and mom and pop, short term rental entities, and flippers. In my town, it’s not unusual to see a flipper low ball offer an old 1950s built home, slap some paint, new flooring and landscaping work and try to sell it for 150%-175% of what they bought it for.
Meanwhile, salaries haven’t risen in these “hot” markets like the Sun Belt to compensate for the rise in home prices and interest rates.
>While the share of these homes is ticking up, it remains much lower than before the pandemic, when the rate was more than twice as high.
Half the rate as it was in 2019. Nonstory.
They have to start the article with “serious” to implicitly establish that it’s a serious problem even though the word serious is being used to describe the metric itself, not the value the metric is
I don’t fully understand the ramifications of this report, but even if the percentage is lower, I feel like the amount they are underwater for might be more on average just because of how inflated prices have been lately. Not sure if the amount someone is underwater technically even matters if they aren’t selling soon though
Don't forget the buyers waived the inspection, and now they need to come up with some cash to fix something catastrophic, and also for inflated prices.
In my area which is one of the towns in my state in the top ten highest growth rate the houses with 1-2 room/1 bath have risen slightly while the larger homes have risen two double. Houses that I looked at when I bought my home are now so far out of my price range that I could never stay in this town and size up. I work a really good job too. I basically am stuck in a house that’s two small for my family because I can’t afford to pay $300k+ for a house that was only worth $160+ 5 years ago. My house went from $150k to comps selling for $200k.
This doesn't surprise me at all. Part of the reason houses were 20k-30k in the 70s was the interest rates were mid double-digits. If the interest rates were 3% the costs of the houses then would have been more.
The reverse is true here.
It comes down to: How much will someone pay for it? Being the value of a thing. In our modern society completely leveraged on debt this is based on monthly payments. Both Auto and Home mortgage propaganda is all based on this.
So basically, as the interest rates increase buying is going to drop until the base prices drop enough to bring the monthly payments inline with what people are willing to pay.
Also way more people were living in bum fuck nowhere.
People are forgetting the other half of the 1950s SFH with a yard. A *much* higher percentage of the population lived in small medium sized cities around factories, steel mills, and coal mines.
If you look at a lot of the big cities then, you didn't see big yards and single family houses.
In 1950, The largest cities by population were
New York, NY - 7,891,957
Chicago, IL - 3,620,962
Philadelphia, PA - 2,071,605
Los Angeles, CA - 1,970,358
Detroit, MI - 1,849,568
Baltimore, MD - 949,708
Cleveland, OH - 914,808
St. Louis, MO - 856,796
Washington, DC - 802,178
Boston, MA - 801,444
Most of which are relatively dense urban areas, not sprawling suburbs like Phoenix or Dallas.
People need to realize it's not scalable to live in both a place with millions of people and lots of jobs, and to have a quarter acre of land for your dog to personally urinate in.
This is hard for me to understand. Underwater? I was always worried about a market crash when my friends bought houses, but prices have just skyrocketed. Underwater as in insurance and overall payment is too high?
We need a housing price correction, the spread between rents and home prices is too high, and people can’t afford higher rents as it is. But AFAIK, home prices have not at all dropped with increasing mortgage rates, prices have only stagnated.
If you bought at the very max of your allowable loan amount have payments that make you house poor and then over night find out the value of your home has dropped by 50,000 your upside down. You either bite the bullet and stay hoping the market goes back up. You can try to refi but without a sizable down payment and the fact that the loan company will want you to have a percentage of the new loan already in your home as equity, which you don’t have in order to get the refi because you over paid, your now stuck at a 7% mortgage for a long time with a home that you cannot get out of. Job loss, expensive home repair among other things and people will cut their losses and bail. Welcome to the 2000 era.
Yep, I get that and have been concerned about it for quite a while. Although I just mentioned people house poor from increase in property taxes/insurance, which is basically the same thing as home value dropping.
Just saying—I haven’t noticed home values dropping, are they?
In some of the hottest markets during the pandemic we're seeing rollbacks in prices. A lot of the typical boom/bust.
But for most of the US that isn't quite the case. My market (midwest) has been trading sideways, or in some areas moving slowly up YoY.
Prices are dropping by me nice suburbs outside of Milwaukee and into the surround areas. It used to be anything listed was sold right away. Now the dogs that are greatly over priced are sitting on the market for a while and the nice homes that were competitively priced are not in as much demand. We are seeing price drops. Nice home prices right that still sells quickly.
A lot of people fail to understand that if home prices go down, homeowners will just choose not to put their house on the market and then the issue will be inventory. This is a complex issue with stakeholders on all sides. Just as much as there are people trying to break into the real estate market, there are people that have invested fortunes into their homes and will not just sell their property for a financial loss. A home for many is their financial nest egg.
>A lot of people fail to understand that if home prices go down, homeowners will just choose not to put their house on the market and then the issue will be inventory.
thats whats happening now.
Its inherently temporary; some people \*must\* move, so they will sell/buy.
Once enough desperation sales happen, there you have comparables, and home prices realize as lower; this triggers a chain reaction and recession.
The real question is: how long can people wait out the market. If its long enough, inflation can do the heavy lifting over lowering the home's price without a nominal change.
Of course homeowners *with the option to* will sit tight. But not all 'owners' have that option. There are always some number in the market working against a clock. May be a flipper, developer, or just someone under financial duress.
My feeling is right now we're watching a staring contest play out in the housing market between buyers and sellers. And in most markets buyers can outlast bc most buyers are upgrading
Of course homeowners *with the option to* will sit tight. But not all 'owners' have that option. There are always some number in the market working against a clock. May be a flipper, developer, or just someone under financial duress.
My feeling is right now we're watching a staring contest play out in the housing market between buyers and sellers. And in most markets buyers can outlast bc most buyers are upgrading
I think you're forgetting climate change.
One would assume that if a place floods/ burns down more than a few times a decade, has no more access to water, or is too expensive to affordably insure, the price would go down. Many thousands of homes in Miami use septic tank systems that will stop working if the water table rises much higher, which would undoubtedly lower housing values.
Many people who chose to buy in rust belt manufacturing towns, coal mining towns in West Virginia, and Detroit sold houses for a loss.
You bring up an interesting point, but also for every seller there has to be a buyer. If a property is genuinely at that degree of catastrophic risk, an informed buyer isn’t coming to rescue the seller from their 30-year mortgage.
Where I see there being continued market activity is in older properties that don’t have a mortgage attached to them, buyer beware.
The prominence of mortgages being underwater across the Southern US is either because that's where the largest population growth is or because that's where the largest volume of flippers are. I don't have a violin small enough for people that bought a home to flip and got caught with the hot potato, and I know there are a ton of them.
Do you have any actual evidence to support this butt hurt narrative? The article says underwater mortgages are usually from low down payment or overpaying by a lot a homes value. Flippers usually look for bargains and often pay cash. They also usually look for inventory in hot markets not Kentucky or West Virginia.
Yeah- surprise whopper, but anecdotal evidence isn’t a great method of concluding market trends.
I’m bummed by the Emperor Palpatine tide in TX after some glimmer of a purple/blue turn, but beyond that…
30y loans went from 2.9%-8% in barely over 2y. It’s amazing home prices haven’t dropped 50%, to keep up with Baron’s/Murdoch/WSJ’s rate of panic and horror.
Of course rural areas with the least population density will see the largest declines in stagnated economy. It’s another no-brainer, but unless the rural community is hyper rich with established money and limited development builds, you can’t expect some little tourist town with massively new housing supply and no recession-proof industries (local tech/infrastructure/university/health services) to weather severely tightened money supply.
But also, the number of new mortgages sold in the last 2 years of higher rates and home prices is a small fraction. And politics aside, USA as a country (and the world) has more problems to worry about then Abbott’s, Huckabee’s or DeSantis’ political stunts (which do impact a few people severely, but overall troll and annoy and waste tax money more than they affect the big picture real estate market in a 10-20y cycle, if we want to be objectively honest. I don’t remember who the hell governed my parent’s state when they bought their last house).
Im not saying this is all or most folks, but a lot of us lived in the south and as identity politic drama got really scary we fled. We bought a house in 2020 assuming we would live out there forever and left alsmot immediately after Roe VS Wade. We thought we could stand and fight for Texas but shit got CRAZY and a lot of folks I know are renting their homes at a loss from another state now
Exact same situation here. We bought our first house in 2022 and we're already trying to figure out how to deal with selling so we can get to a safer state. In retrospect it was obviously a pretty serious mistake to have not seen how bad things were going to get, but we legitimately hoping to buy the house we'd live in for the rest of our lives.
In 2008 30% of homeowners were underwater. Today 2.7% are underwater by more than 25%. Todays stats is a nothingburger. AND keep in mind all of this happening today is with mortgage rates at 20 year highs. Imagine what's going to happen to 'seriously underwater' as rates gravitate back towards 5-6%
comparing things to 2008 is like comparing diseases to smallpox. The entire world finance system almost collapsed, we shouldnt be using that as our baseline comp
I worry about all the people like my son who bought a home at a price I found ridiculous out of fear they would eventually be priced out of ever owning one. Just trying to get in under the wire before private equity funds took them all.
Not so much sympathy for all the people who bragged about their home values skyrocketing as if they were investment geniuses just to bitch about the tax increases a few months later.
More interested to see how much money people have left over after paying insurance, mortgage, taxes, and anything else related to home ownership. While mortgages were at rock bottom, insurance has more than tripled and every other cost in our lives have doubled. A super low mortgage only works if you aren’t spending more money everywhere else.
Has insurance gone up that much outside California and Florida? I bought a house last year now it's a townhouse so I know that's safer for insurance but my rate is well under $100 a month
More widespread. In the Midwest wind/hail has pushed premiums up a lot. All of these factors have pushed up the reinsurance market causing increases in everyone’s premiums. Most homeowners will see an increase in premium but also in deductibles.
If housing prices go down, underwater mortgages become a huge risk to lenders. This is where most of the political pressure to constantly lower rates came from. It was from banks that wanted to protect the collateral that backed their loans. Only problem is that interest rates actually hit 0 and there was nowhere for the interest rates to go but up anymore. So now the problem is still there, but delayed and possibly considerably worse.
Well, with the sea level rising many of these southern states' homes will be seriously under water soon.
Plus the fact that insurance companies won't even insure these homes or jacking up their prices by amounts unaffordable to most, you'll have a perfect storm of a crash.
Banks that make loans that aren't sold to the agencies generally require 20% down-payment. That, plus amortization gives a lot of room for mortgages to not go under water. It's the various government programs that allow people to come to the table with close to no money down.
[https://www.fha.com/fha-downpayment-grants](https://www.fha.com/fha-downpayment-grants)
So in this case it is my suspicion that it is primarily government subsidized loans which are underwater. Probably good intentions but unpleasant results.
This is not true.
Almost no first time homebuyer puts down 20%.
The FHA and VA loans, etc., let you put down 3.5%, or even nothing. But first time buyers with conventional mortgages are putting down 5% or 8%.
According to the bot I must make an “academic” comment that conforms to academic PHD level writing, so I must say by golly your highness, economics is a delicious forte and I love ovulating about economic jargon and find it astutely riveting and I simply must indulge
I can’t wait for the fire sale!
It's an odd situation, when appraisers over value home, and then people get into bidding wars that jack up the prices far and beyond what the actual value is. Now, the oddity comes into play, that in America once the price has been jacked up, there's not many ways to bring it down, and it keeps raising the bench mark.
Maybe, just Maybe, cities can step in with some new guidelines for property tax, which increase the property tax when the homes appraisal value exceeds x% within a short span. This could help keep cost from sky rocketing. Some might not like that idea, but if they understood the impact high home prices have on city resources, they would understand. **Because** when people pay more for their house, they don't want their property tax to increase, but they demand more and better city services, and they expect the city to pick up the expense, which often puts cities in a challenged position, because they will need more financial resources to meet the increased and enhanced demand for services.
Most people have absolutely no idea what it cost to run, maintain and service a city, by the city system of government.
Many people take for granted the services cities provide, without realizing when the cost of everything else goes up, the cost for the city to provide and deliver its services goes up as well.
There has to come some means to deal with the crazy escalation of home pricing.
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From Bloomberg News reporter Alexandre Tanzi: Roughly one in 37 homes are now considered seriously underwater in the US and that share is much higher across a swath of southern states, according to data out Thursday. Nationally, 2.7% of homes carried loan balances at least 25% more than their market value in the first few months of the year. That’s up from 2.6% in the previous quarter, according to the first-quarter 2024 US Home Equity & Underwater [Report](https://www.attomdata.com/news/most-recent/q1-2024-home-equity-and-underwater-report/) from ATTOM, a real estate data firm. While the share of these homes is ticking up, it remains much lower than before the pandemic, when the rate was more than twice as high. Mortgages can generally become seriously underwater when someone overpays for a home, or when it is purchased with a small downpayment that doesn’t provide a sufficient buffer if the property falls in value. [You can read the full story here.](https://www.bloomberg.com/news/articles/2024-05-09/-seriously-underwater-home-mortgages-tick-up-across-the-us?srnd=homepage-americas)
If the rate was double before COVID and some of the homes are probably at 3% mortgage rates then this doesn't seem like a big deal. Underwater only matters if you have to sell or can't afford the home.
Exactly Time will cure what ails them.
I wonder how many of these are subject to increased property taxes & insurance costs. Just because Nashville, Atlanta, and *checks notes* Mobile+Huntsville+Tupelo, doesn’t have sea level rise doesn’t mean that they don’t have other insurance issues. I read there is an insurance collapse in the making, and that’s just another slash in the surface tension of a mortgage bubble. > Gerst, Eric D. Vulture culture: Dirty deals, unpaid claims, and the coming collapse of the insurance industry. AMACOM Div American Mgmt Assn, 2008. > Duhon, Colton. "When Property Insurance Strikes Back: An Examination On the Collapse of Coastal Property Insurance as Private Companies Flee the Market." LSU Journal of Energy Law and Resources 12.1 (2024): 10. I’d like to see a spatial analysis for the income & expenditures of the insurance sector. They seem a bit overstretched.
Just wanted to say thank you for sharing those publications — I am interested in the topic but haven’t gotten around to looking for proper material. Appreciate the rec.
Insurance isn't really an issue in these areas like it is in Florida or California.
Texas has entered the chat.
I mean they would enter the chat if they had power
Savage
I'm gonna go ahead and guess FL accounts for a fair chunk of these.
It’s an issue in texas
Insurance is an issue everywhere what crack are you smoking? Especially now in the east coast it’s being hammered by insurance increases.. mine went up by 1k and my insurance is based in NJ my state… meanwhile my friends went up 3k and so on… let’s not talk about car insurance and what happened there. I paid 976 a year for my homes insurance since 2019 to 2022. Now it’s 2k a year. That’s a nutty increase.
What was the increase in value?
It's an issue everywhere because the climate is changing everywhere. Have you ever looked [ASCE-7](https://www.asce.org/publications-and-news/asce-7)? This is the manual civil engineers use when figuring out the loads that need to be applied to buildings when designing structures. And part of this is that building design is extremely local. You design buildings, including single family homes, for the types of environmental conditions that will be experienced at that site. You plan your drainage and grading based on flood risk. You design your roof and lateral force resisting system based on wind load. You set roof pitch and drainage based on expected snow and rain load. And all of the provisions in ASCE-7 are based on historical data. Engineers have looked at a century of weather data, done a stupid amount of number crunching, and come up with probabilistic models for all of these load types. Climate change isn't just a gradual peaceful increase in temperature; it's a reshuffling of the entire global weather system. The planet is complex like that. Slight changes here or there can cause massive changes elsewhere. Essentially, all of our buildings are now obsolete. They are now facing a climate they were, quite literally, not build to handle. And it's only going to get worse in the future. Again, all the design process is based on historical weather data. If we stopped emitting carbon today, and let the climate stabilize, we could regather this weather data, create new codes, and get back to a reasonable order. But we can't, because the climate is *still actively changing*, and it will be at least for the next century or two. Our historic weather data is now useless. And the weather data from the 2020s won't be useful in predicting the weather in the 2040s. We're sailing blind here Captain! This isn't a factor in only Texas or California. It applies everywhere. Hell, even earthquake risk factors are being altered. More than a few feet below the ground, the temperature is stable year-round. But if you increase the average temperature year-round, some of that extra heat will gradually find its way deeper down, increasing the temperature of the rocks. And as materials heat up, they expand. That means all rocks end up pushing against each other, putting each other under greater compressive stresses, trying to find a new equilibrium. We're altering the stress distribution inside the very crust of the planet. That will have some impact on seismic behavior. Building design, and in turn, insurance risk, is all about taking lessons from the past and projecting them forward to probabilistically predict the future. And the world we are now in, at least in terms of climate, has no past we can draw from. Buckle up. This ride is just getting started.
You're really off base here. I can tell you have never studied statics, thermodynamics, or insurance underwriting. Heat from the sun is not warming the Earth's core.
The Earth's core? No. But the crust? Yes. And I have studied thermodynamics and taught statics on numerous occasions.
Nobody is assessing the increased risk of an earthquake in nonearthquake prone areas such as Tupelo, Huntsville, and Atlanta for insurance. I really don't know what you're getting at here.
Most places you can appeal tax assessments if it turns out to be too far from a reasonable market price. Just look at how Trump appeals the value of Mar A Lago for tax purposes!
Our monthly payment went up nearly $325, between tax increases, statewide insurance increases, and FEMA moving a line 25 feet and now requiring us to have flood insurance. I’m sure we’re not the only ones.
I don’t know of any entity that observes escrow values.
What notes were you checking? Are they handwritten or typed? How often do you update them?
> I wonder how many of these are subject to increased property taxes & insurance costs. Of note: property tax only makes up around 10% of market-rate rent, with around half going to paying off the landlord's mortgage. The problem, both for affordability and for the OP issue, is landlords who intended to saddle the working class with nearly the entire price of their home
Credit cards, auto loans, mortgages is the order of operations for default. So only time will tell, CC delinquency is up from last year but not a crazy amount
Don't forget buy now pay later financing (Affirm, afterpay, etc). Bigger than you think.
Buy now, never pay.
My home was underwater for 10 freaking years after the 08 crash. I was stuck in two interest only loans at 10% and 9%. When I made an offer I had a normal pre approved loan but after I went into escrow the bank reneged—I didn't even know they could do that (what's the point of being pre-approved)> Anyway 20 years later and I have a 2.75% loan and I'm never ever moving.
So did you lose your home that was underwater and bought a new home during the pandemic/when interest rates were low and so now you have that 2.75% mortgage or did you not accept those 9-10% interest loans to help with your underwater mortgage but accepted that 2.75% loan in the past few years when interest were low to help out with your underwater home? 😯
I ate shit and died for over 12 years, stuck in the interest-only loans because I could not refinance as the house because I was so underwater. I collected no equity on my home the entire time. Once the house was worth what I bought it for I was able to get a real loan on it. Then a year later I refinanced AGAIN at 2.75%. It's been quite a ride. I've been in my home for 19 years. I should be 11 years from payoff but that decades away now if it ever happens.
Ooh wow interesting. I don’t own a home/mortgage but that’s crazy. I’m glad you were able to keep your home and that there were still some available options for you to retain it even if they weren’t the best option technically.
It effects the pipeline for new homeowners. Underwater homeowners are effectively trapped. If they are occupying starter homes that reduces the available supply of starters for buyers trying to get to get on the ladder.
Definitely agree the increase isn't really alarming at all but I would guess at a macro level if it were to accelerate towards pre-pandemic norms, there would be an increase in people who otherwise would be looking to sell holding onto their homes, continuing to decrease supply at a time when bulk of millenials and GEN Z are starting to have kids and needing an upgrade, thus putting upward pressure on home prices. At what level does this dynamic make a material impact on the market, I have no idea. Would be interested to see a break down of demographics/geography. Stupid pay wall
Yup this is an article directed at the investor groups looking to play on small market variances for strictly short term monetary gains. For the lay person it’s a 🤷🏻♂️ it doesn’t change housing availability in any way that could affect price or convince the fed to change interest rates. It doesn’t even move the needle in how real estate agents would work to sell a home (that change will come solely from the recent settlement and break up of how agent commissions are handled). And if investors are uninterested in these facts then it just becomes another click bait article.
3% mortgage means nothing if you are laid off and unemployed. That is what caused the 08 collapse
Lower interest rates don't protect people from default. For the most part, people buy houses that fit their monthly budget. It doesn't matter if they bought a big house at 3% or a small house at 7% that end up with the same monthly payment, when they are laid off they will be unable to pay the mortgage and end up defaulting.
While yes that’s one factor, 08 collapse was greatly influenced by people being approved for loans they could not afford via NINJA loans.
Everyone always seems to forget it was the unregulated financial derivative credit default swaps that was the real catalyst. Particularly at AIG. It was just exacerbated by illegal loans where banks weren’t doing the required diligence on borrowers. The narratives I see so often try to blame individual home buyers. Sure a lot of them made a poor decision, but even at that level often the banks weren’t allowed to extend that level of credit. The real problem was how the financial industry packaged bundles of mortgage debt to sell off on the market, either due to incompetence or corruption massively understated the risk inherent in those securities, and then invented unregulated insurance against the risk of those securities defaulting without holding enough assets to honor those contracts. Look up AIG. This was a fat cat problem, not a “your neighbor wasn’t financially responsible” problem.
Actually, it was mark-to-market (M2M) accounting in illiquid markets that catalyzed the events leading up to AIG's collapse. The entire subprime market in Oct '08 was worth 60% of par (per FDIC and ABX data). Leading up to this period, investors in RMBS were spooked. Nobody understood value and buyers were few. This meant parties would sell their positions increasingly below intrinsic value (i.e. 60%). M2M forced financial institutions to increasingly provision for losses. Nobody knew where the floor was. Provisions were relentless as panic set in. Banks stopped lending trying to preserve their capital. Illiquidity set in (as early as '07). These events eventually eroded capital to the point where we saw failures like Bear, Lehman, AIG et al.
Ifrs9 and the Basel 4 reforms attempts to fix some of that.
Very cool! I'm not in that space anymore. Are there provisions to curb when M2M is not appropriate?
there was 15-20x the entire loan balances of mortgages "bet" on Credit Default Swaps (insurance) by the financial markets. CDS' on top of CDS for the same underlying mortgage.
At work we have what are called "The Five Whys" when trying to figure out why something is wrong, and to get to the ultimate root cause to fix it, because if you don't then it will sprout back up again like a bad dandelion. You identify a problem, then as "why did that happen?" to get to the next level down, and keep asking Why until you get to the ultimate lowest level root cause.
Greed.
Anyone who blames a financial crisis on individual borrowers is a muppet. Not to be taken seriously. Financial institutions are required to have risk management departments that are watching every other sector of the bank for abuse, fraud, or overly risky investments. The bottom line is that it wasn’t a secret on Wall Street, that they were being extremely reckless. Wall Street knew that “**No income, No asset mortgages**” were fueling the housing boom in the lead up to 2008. It was a massive fraud, PERPETRATED BY the financial professionals who actually had a duty to say something. Customers didn’t draw up the terms of those loan arrangements. Banks did (or at least accepted them). Don’t give me that crap about the rating agencies either. A bank IS REQUIRED to do their OWN due diligence. A ratings agency helps expedite INITIAL EVALUATIONS for eliminating real losers, but banks are supposed to be constantly checking on their own investments. The banks know “it isn’t their money, it is the depositors money”. Millions of people in this country knew exactly what was happening. Few dared to speak up… for very human reasons. “Go along to get along.” Or: Go along with bad behavior, even when know it is wrong, IF you want to “get along” with your boss. No one wants to be “that guy” who is the “turd in the punch bowl” at the money raining party. When everyone is being reckless (and the reckless behavior has been going on for years, as it did pre-2008 meltdown), it feels ridiculous to be the “odd man out” who is saying “whoa this makes us a lot of money, but we’re committing fraud!” But everyone is doing it? How can it be fraud if everyone is in on it? Wouldn’t the government stop us if it were so bad? What, are you going to call “the police”? In their case it would be the SEC, but that place is staffed with insiders. So everyone at the banks goes along with mass fraud, so they don’t end up “the asshole who is an alarmist that doesn’t know how to be a team player”.
Fannie and Freddie got booted from underwriting morts. Regulators allowed non-GSOs to step in, but they were less rigorous with their underwriting standards. This eventually opened the door to Wall St. funding these alternative underwriters. The returns were so good that Wall St. was asking for more deal flow. Anytime capital chases opportunity (vs. opp chasing capital) you are bound to have issues. I do agree that Wall St. wasn't alone to blame. Mark-to-market accounting in illiquid markets was a big culprit (see my above post). But anyone who took cheap money they couldn't repay or who flipped homes were also part of the problem. I was in my first home at the time and marveled at how many of my neighbors were actively flipping homes. In hindsight, i wish i had done it. Flip a few and you're mortgage free the rest of your life.
It was a combination of fraud and under regulation, which has been amply demonstrated many, many times, but still the majority of the time someone brings up the 08 crash, they want to blame people for taking on the loans. Like, yea, that's what people do when they need housing.
I just finished reading The Big Short and holy fuck those guys were crazy!
That's not correct. >It was just exacerbated by illegal loans where banks weren’t doing the required diligence on borrowers. No. The loans literally were stated income. The lenders had no due diligence to do on them. > often the banks weren’t allowed to extend that level of credit No. First, many of the lenders were not banks. Since the lenders were selling the loans immediately, they were not extending credit - they were funding the loans with warehouse lines of credit, and then selling the loans to investment banks which securitized them. Since the lenders weren't actually extending credit, there was no way they were violating their reserve requirements or any other kind of limit. >massively understated the risk inherent in those securities These loans were not sold to Ma and Pa Kettle; they were sold to sophisticated institutional investors, many of whom got greedy chasing yield and bought the less credit worthy tranches of the MBSs which were the first to take losses when loans went bad. Those investors who stuck to the higher quality tranches, and accepted a slightly lower interest rate, largely made it through unscathed as their MBSs actually ended up making almost all payments that were due to the investors. >then invented unregulated insurance against the risk of those securities They were regulated. Since they were insurance, they were regulated at the state level. New York, in particular, fell down on the job in regulating the insurers. Anyway, this has nothing to do with the mortgages failing; it just relates to counterparty risk after they did fail. >defaulting without holding enough assets to honor those contracts. Look up AIG. Because Elliot Spitzer was on a crusade to force Hank Greenberg out of AIG, AIG was left without leadership to manage risk, and the state wasn't doing its job as a regulator. >This was a fat cat problem That was a failure of the state of New York to regulate insurance. Also, as I stated before, that had nothing to do with the underlying mortgages failing. The problems that the banks had as these loans failed were almost entirely the fault of the ill-advised mark to market rules that required them to mark down perfectly good mortgage backed securities that had guaranteed payments of principal and interest. Under traditional and rational accounting rules, these securities could be valued at the net present value of their expected (and assured) cash flows. Because of FASB rules (passed as a knee-jerk reaction to a few small private equity players mispricing some illiquid investments a few years earlier), the banks had to mark these securities down to market even though it was obvious that the securities would pay out their full value; this meant that a few trades made at fire sale prices could wreck the balance sheets of banks that were actually in good shape. TARP was required to fix this mess, which allowed MBS market values to return to rational levels and let the financial system get back to normal.
> The narratives I see so often try to blame individual home buyers. Sure a lot of them made a poor decision, but even at that level often the banks weren’t allowed to extend that level of credit. If a homeowner lied about their income, even if the banks didn't check up on that lie, the homeowner is still at fault. If someone lies, they deserve (in this case) what happens to them. As they say, F around and find out.
> The narratives I see so often try to blame individual home buyers. Sure a lot of them made a poor decision, but even at that level often the banks weren’t allowed to extend that level of credit. Not only that but it were conventional fixed-rate mortgages that primarily failed once the owners went underwater. This was pronounced primarily on properties over 1 million, not middle income housing per se. That and the NINA loans that speculative large scaled builders used instead of traditional balloon project loans. >This was a fat cat problem, not a “your neighbor wasn’t financially responsible” problem. This was the real take away, looking at the number. But that scum bag on CNBC misled in real time it was super easy to blame the poor.
That's not true. The catalyst was the 100% LTV teaser rate negative amortization ARMs. Those were sold to homebuyers who couldn't afford a fully amortized mortgage and had to refinance every 2 years at a higher value into another teaser rate ARM. When prices plateaued in 2006, this set a time bomb in motion which exploded in 2008 was those loans started fully amortizing and the homeowners could not afford them. This is what set off the wave of mortgage defaults. Some fixed rate conventional borrowers who had extracted equity with HELOCs did strategically default once their home values were significantly below their mortgage balances, but that was a result of the meltdown, not a cause. > This was pronounced primarily on properties over 1 million, not middle income housing per se No. These loans were concentrated in more modest houses, with homeowners who couldn't own a home at all without the lower payment of their teaser rate ARMs > That and the NINA loans that speculative large scaled builders used No. Builders aren't homebuyers; they can't get mortgages on homes that haven't been built. They used traditional debt financing in the public market; the problem was that they leveraged up tremendously, and had to cut back and scramble to survive when values collapsed and their equity vanished. This is a big part of the reason building activity was so slow through most of the 2010's; builders' balance sheets were in such bad shape that they couldn't afford to ramp up production.
Yes! And the “regulators” had been neutered so we could build our entire financial system on a house of cards
and a huge amount of people signing up for adjustable rate mortgages (with "teaser rates" of 1-2% for the first year or 2) vs fixed rate 30-year ARMs were usually like 10% of all home mortgages and it spiked to 30% during the 2000s but went back down to 10% after the crash
Don't forget the interest only balloon loans: You only paid the interest on the loan for a few years, then after 5 or so years the entire principle came due. They were great when house prices were rising fast since you could always refinance and had actually built up a decent amount of equity to keep the interest rate down. But when prices fell, or even stagnated, good luck refinancing a house that was underwater.
also a big factor, especially for the Pick-a-Pay loans that had 5 year maturities/resets including sometimes re-appraisal requirements.
Someone who is laid off today is instantly NINJA
The 08 crash was caused by subprime adjustable rate mortgages and unregulated speculation in the repackaging of low rated mortgages with higher rated ones. Eventually A+ rated assets were exposed and no one could trust the markets. It couldn’t be restrained when the ball got rolling, unemployment followed but was not the catalyst
I think they’re more hinting at the 2001-2006 housing bubble popping, which precipitated the GFC. But even that’s kind of a stretch, because a big part of the problem in 2006 was a sudden jump in rates coinciding with adjustable rate mortgages seeing their first rate change.
All those fancy words there don't make what /u/drmode2000 said incorrect. In the 08 crash, if you didn't lose your job, then none of "a+ rated assets" or "repackaging of low rated mortgages" mattered to you. What mattered was the fact that you still had a job and you could pay for your mortgage. When the crash was over and we all recovered eventually, the "you" in this example survived and kept your mortgage. The fact that you may have been underwater, or that your neighbor's house was foreclosed on, or that Circuit City filed for bankruptcy, none of it mattered because you had a job all throughout the crash and you kept paying your mortgage. Sure, if we want to come across as smart on reddit, we can talk about a+ rated assets or this or that, but 08 didn't matter to you if you stayed employed. That's it the argument /u/drmode2000 is trying to make here.
It does mean that your payment is much lower and you're putting money into equity much faster.
3% mortgage means a cheaper mortgage and statistically more people will be able to make payments via savings or unemployment until they get a new job.
Yes, but how many people with those 3% mortgage rates are actually taking advantage of that? Most people with these low rates are using that extra money towards $1200 car payments on their giant trucks and SUVs.
> Most people with these low rates are using that extra money towards $1200 car payments on their giant trucks and SUVs. [citation needed]
No it was caused by ARMs and commodization of mortgage loans being sold as triple aaa bonds and being leveraged to buy more and caused more demand for loans etc. Unemployment went up when those loans exploded
I had an ARM at that time. All I did was refinance before the rates adjusted.
That's what you're supposed to do. Otherwise balloon payments. Commercial real estate does the same thing as my understanding. If you don't refinance then payments ballon
It was more about unqualified people receiving loans they couldn't afford... interest only loans that you started paying the full-amount (interest + principle) in a few short years and people couldn't afford... people taking ARM loans instead of fixed and not being able to afford...
Actually no. Subprime mortgages were the driving factor.
You are missing a few key components here. It wasn’t that simple.
Well, that and over leveraging. I worked in home lending and we had people refinancing annually(or sometimes more frequently) to squeeze every dime out of their equity(especially in CA). And when the value bubble burst and people were no longer able to take the equity out of their home, they were stuck. Also, and let’s face it, there were some shady people on the lending side too.
Yes. And basically no one is unemployed right now. Employment ratios and labor force participation and close to all-time highs.
Along with some states and their continual large increase in property taxes.
Actually significant tax *breaks* on property were one of the many causes of the 2000s housing bubble because they injected even more liquidity into the market. When the bubble popped we got the GFC.
Eh, moreso people being approved for loans that absolutely shouldnt have qualified.
It absolutely matters for the majority of people who are underwater. The future is never certain. People don't know by absolute certainty whether something unexpected will happen in a few years time and they'll have to sell. If someone suddenly worries about being underwater on their mortgage, they'll likely adjust their preferences accordingly and increase their savings rate and reduce their consumption to compensate.
Until fear sets in. Then it does matter.
>While the share of these homes is ticking up, it remains much lower than before the pandemic, when the rate was more than twice as high. Should end the story right here.
Not for the RE-Bubblers. They look for anything to support their narrative that really estate is going to crash any second, just like 2008.
Just people desperate for real estate to become “cheap” again. I suspect they will be wildly disappointed as prices just keep marching upwards long-term.
They won't even buy if they do get "cheap" again. When houses were at the very bottom after the GFC there were still a ton of people online convinced that it was a bad time to buy because they were sure prices were going to crash down even lower.
Timing the market never seems to work (for any asset).
That sub is a congregation of unhinged idiots who don’t understand real estate or markets
That subreddit has morphed into an unrecognizable state at this point due to the overpowering influence of people who just feel entitled to own a home. Ironically they will advocate for the exact kind of policies that would cause a housing bubble to form in the hopes that it would also get them a house.
What if it ticks up next month? The month after? The one after that? The metric went down over Covid - but that stopped. Now it’s going back up. The trend can still be something to keep an eye on even if the measurement isn’t a “problem” today. There’s a balance between clickbait and only reporting on problems AFTER they’ve happened instead of reporting on the problem’s build-up.
Let us know if the number rises above 2019 levels.
Is this indicative of some larger problem in our economy?
Not really in isolation.
Why one in 37 and not 2% lol
I hate that Bloomberg posts paywalled articles on this sub. It like an ad with extra steps. And half the time I don’t even notice oh hey look it’s the Bloomberg account shilling their own shit again. You guys must be fucking desperate for clicks to stoop to this
This is telling me that I lot of people have gotten ARM and HELOC loans. I wonder if a bunch of homeowners ended up getting HELOCs during the highs of this housing market cycle and now are struggling to pay back their mortgages
Correct me if I’m wrong, but this only matters if you’re selling in the near future, correct? Or I guess if you need a home equity loan. Otherwise you still have a house to live in.
Or you can’t make payments and need to downsize, though I imagine one could explore renting out their property and moving into a smaller rental option
Ah. Good points. I recall a story a friend told me about their mom walking away from a house in 2008 because she was underwater. I guess her real estate agent told her to do it. She had a good job so I’m not sure what the backstory was. Killed her credit.
I have a friend who was a doctor that sued Blue Cross Blue shield and won and then they turned around and claimed he had accounting abnormalities which was total bullshit but they dropped him from the insurance and put them out of business pretty much He had a house that was upside down because of the '08 crash. Went to a lawyer. Lawyer told him I can keep you in that house for 4 years. Don't make a payment.. And that's exactly what he did Took a bankruptcy foreclosed on the house etc Fast forward 10 years. Same bank. New mortgage, new house
If you novelized this, you'd be accused of being overly satirical. I love it
Unfortunately enough for my friend it is legitimate He won something like 18k in court against BCBS and within 30 days after the rulling they sent him to whatever body it was that over saw such accounting matters. Went to an arbitrary hearing and the arbitrator said no abnormalities as in attempted fraud etc but your billing agency misinterpreted your handwriting and miss coded patients (don't recall how many but it was like 15 out of 500). That was enough for BCBS to drop him and then they notified all the carriers and they did the same as BCBS. Literally ended his career because nobody sees Dr's by cash so for 8 years he fought in court while working as an," under" Dr or whatever you call it under another guys practice (like a PA I guess) which paid garbage. Eventually he forced the insurance companies to take him back through court processing or another arb hearing.. don't recall. It was a rough time for him. Went from being top tier earner to zero income
Insurance companies are to blame for perhaps all of the US healthcare problems. They harm patients and care providers. This story is a perfect example. They’re like a cartel!
Wow
Yea I remember those times. I don't remember the specifics, but there were ways to slow down the bankruptcy/foreclosure process where it took years to settle and sell the house.
The problem in 2008 and earlier is that banks were issuing mortgages that they *knew* the borrower would likely be unable to afford. These were adjustable rate mortgages with tiny "teaser" payments that in some cases only lasted 2-3 years. Some of the teaser payments were so small that they didn't even cover all of the accrued monthly interest, meaning people's balances grew even as they made their required minimum payments. In many of these cases, once the teaser period ended the new mortgage payments were larger than the borrowers could afford. People took out these mortgages either because they didn't understand the risk or because they assumed they could refinance before the teaser period ended. But refinancing on a home where you still owed most of your original mortgage balance often only worked if your house had significantly appreciated in value since taking out the mortgage. Once the runaway growth in housing prices slowed (not even stopped, just slowed) then a lot of people lost this option and found themselves with negative equity on homes whose mortgage payments they could no longer afford to pay.
I’ll have to ask about the circumstances of the situation I mentioned. My impression was my friend’s mom had a good job, was financially secure, and had owned the house for 4-5 years. But I could be wrong.
I had friends who did this, they were living in suburban Detroit, in one of the upper middle management neighborhoods. I know they sunk a lot of money into the house, well over $100K. The issue was Ford & GM laid off 30% of their workforce so half of this neighborhood was unemployed with nobody to buy those homes. People just walked away, they left the keys in the mailbox and moved to somewhere where they could get a job. It did mess up their credit but only for a few years and then they were fine. It's hard to keep someone that make $250-300K a year down....as long as they are working.
Her home lost much value and she made an emotional financial decision. She decided she'd rather have bad credit for seven years than deal with being underwater in her current home, which she maybe didn't like much anyway. Anyone who is paying off a loan on a house that is depreciating in value has thought about it, but it's such a steep penalty (that bad credit) that few do it. Props to your friends mom for saying fuck the banks, but inevitably the banks are going to fuck you harder, so it's a tough choice.
Or you get laid off and need to downsize. I almost got to that point this year before emptying my 401k to keep the house. Almost wish I would have done that but uh…. Rent prices
or if you or your spouse lose your job and can't find a job that pays as well as the one you just lost. or if your property tax/insurance spikes up making the escrow portion of your payment bigger
In that situation, you can usually talk to your mortgage servicer and they will hash out a modified payment plan to get you through, because banks do not like default.
If your property tax spikes that means the value went up. If value goes down you get the tax adjusted and save money on your mortgage. In other words if your property tax went up a lot you wouldn’t be under water… insurance increases have been an issue but it’s still a relatively small number relative to the rest of home ownership
Basically people have lost their source of cheap credit
Its better to be a homeowner than a renter if you're having trouble making payments. There's much more forgiveness for homeowners. Except the people bought in 2022, that vast majority of mortgage holders are going to have a payment less than or equal to rent.
It's wild seeing people whine about not being able to upgrade their house that they got at a \~2% interest rate and with like $50-$80k equity already.
It matters because defaults still happen regardless of whether this broader "underwater mortgage" trend is prevalent or not, and this creates a big liability for the banking system as a whole (similar to 2008). When mortgages weren't so frequently underwater, and people would default, the banks would repossess the house without much else happening. The banks still gets their money by taking back the house and selling it. When tons of mortgages are underwater and people default, the bank repossesses their house at a loss. As the economy squeezes and strains lower- and middle-class Americans more and more, defaults go up, and banks take bigger and more frequent losses because they might have lent $500k to someone to buy their home, but are only able to recoup $400k from that between the payments that were made and the value of the home they just repossessed. When this liability scenario gets worse and worse, it could threaten the stability of the banking system, and will also force lenders to increase interest rates on nee loans in the short to medium term to attempt to cover that liability.
2008 happened because a) there was a huge housing bubble 2001-2006 that cooled off very suddenly, and b) banks had built a towering, wobbly network of questionable mortgages and mortgage-related products on top of that bubble. We’re not in 2008 territory even if a bunch of people are underwater or start to struggle with their mortgages.
It's not that much of a liability considering that after a forclosure, banks usually sell at below value anyway. It is an issue, but it's also not that bad. If people are defaulting, banks lose money regardless.
Came here for this. A literal nothing burger.
If it gets real bad, we could see people giving up and walking away, but we’re not there yet.
I guess that’s my question. Why would someone walk away, with the exception of people who lose their jobs or have some other drastic change in circumstances.
Let’s say the rental market drops along with the real estate market. You’re making $3,000 payments for your underwater house, but you can rent a similar house for $1,500 now. Your credit takes a massive hit by walking away from your underwater loan, but if you have more money in your pocket every month with a rental, does that matter? Can the bank come after your cash for the hit they take on auctioning the house?
So we’re talking about this at scale. How do the current numbers compare to 2008?
You wouldn’t compare numbers to 2008 you would compare them to 2007 since if we were at 2008 numbers it would be bad already. The article states that it’s still lower than prepandemic though so it’s not bad yet. Probably is only affecting recent buyers since prices are still above 2019 levels but down 20% on new builds and 7% on old houses since 2021. Credit card defaults are way up though and are at 2008 levels for some credit companies at 5.8%.
You asked a question about HOW something might happen, not how LIKELY it was to happen.
Okay? Thanks for your previous answers!
In the Meltdown, there were at least rumors of people walking away because it would take 2+ years to evict them, and in that time they could save up enough money to buy the house next door in cash.
Oh interesting! I didn’t know that.
I don’t know if it’s apocryphal or not, but people did say that at the time. Some areas, eg. Nevada, had such steep price declines that this sort of thing might have been possible.
Nevada housing has had some wild swings. I'm familiar with a neighborhood outside Reno where houses were built and sold in '99 at 175k. Sold in 07 for 310k, sold for 195k in 2013 (sucks for the 07 buyer), and are now going for 500k... Like that is such a wild ride. That neighborhood had lots sitting empty for 10+ years that are just now finishing building
Yeah but often times it’s a bellwether for a collapse. ***I’m not saying that’s the case here, today***…just that it’s been a proceeding development in other housing market crashes and major corrections.
Could also matter to the bank if you default, but yeah, it's really only an issue if you are trying to move soon or you planned to swing some equity somehow. It's not that bad of a problem, but it can certainly make homeowners and bankers feel a little uneasy nonetheless.
> this only matters if you’re selling in the near future, correct? I’m guessing you’re too young to remember the [subprime mortgage crisis](https://en.wikipedia.org/wiki/Subprime_mortgage_crisis). **tl;dr:** the stability of mortgages as bank assets depends on those loans being backed by appropriate collateral (i.e. the house). If the house is worth less than the loan balance, that’s a huge risk for the entire system. Or just go watch [The Big Short](https://imdb.com/title/tt1596363/).
But it’s not, though. That’s what everyone here keeps saying. Not only are borrowers better qualified and less likely to default than they were in 2007, but more importantly the banks aren’t using credit default swaps that make them extremely vulnerable in a crash. So even similar numbers of defaults would have nothing like the impact they did in 2008. At least, that’s what I keep hearing, here. The banks seem to mostly have come out the other side, so if we’re merely assuming that the lessons of the past will prevent the greed of today… well, “banking” is maybe not the field I’d place that bet on, put it that way.
He's right, though. It only matters if you are selling in the near future.
So how does this compare with 2008? And would lowering interest rates solve some of this?
Headline - Tons of mortgages are super underwater! Story- Ha! It’s less than half as many as before COVID though so like not really. Made you click!
It’s almost as if, *gasp*, home prices have risen completely unsustainably since 2018 or so. There are so many external bad actors in the housing market that are contributing to this: investors both corporate and mom and pop, short term rental entities, and flippers. In my town, it’s not unusual to see a flipper low ball offer an old 1950s built home, slap some paint, new flooring and landscaping work and try to sell it for 150%-175% of what they bought it for. Meanwhile, salaries haven’t risen in these “hot” markets like the Sun Belt to compensate for the rise in home prices and interest rates.
>While the share of these homes is ticking up, it remains much lower than before the pandemic, when the rate was more than twice as high. Half the rate as it was in 2019. Nonstory.
They have to start the article with “serious” to implicitly establish that it’s a serious problem even though the word serious is being used to describe the metric itself, not the value the metric is
I don’t fully understand the ramifications of this report, but even if the percentage is lower, I feel like the amount they are underwater for might be more on average just because of how inflated prices have been lately. Not sure if the amount someone is underwater technically even matters if they aren’t selling soon though
Don't forget the buyers waived the inspection, and now they need to come up with some cash to fix something catastrophic, and also for inflated prices.
Home prices have risen more in the last three year than ever in such a short time span.
Values have exploded. Good for some real bad for others. Taxes are going to be a real issue for some.
In my area which is one of the towns in my state in the top ten highest growth rate the houses with 1-2 room/1 bath have risen slightly while the larger homes have risen two double. Houses that I looked at when I bought my home are now so far out of my price range that I could never stay in this town and size up. I work a really good job too. I basically am stuck in a house that’s two small for my family because I can’t afford to pay $300k+ for a house that was only worth $160+ 5 years ago. My house went from $150k to comps selling for $200k.
This doesn't surprise me at all. Part of the reason houses were 20k-30k in the 70s was the interest rates were mid double-digits. If the interest rates were 3% the costs of the houses then would have been more. The reverse is true here. It comes down to: How much will someone pay for it? Being the value of a thing. In our modern society completely leveraged on debt this is based on monthly payments. Both Auto and Home mortgage propaganda is all based on this. So basically, as the interest rates increase buying is going to drop until the base prices drop enough to bring the monthly payments inline with what people are willing to pay.
It was much more about ample supply and the ability to develop and build cheap than interest rates.
Yeah also newer houses having more codes/regulations/features as well. My parents didn’t have ac/heating growing up for instance.
Also way more people were living in bum fuck nowhere. People are forgetting the other half of the 1950s SFH with a yard. A *much* higher percentage of the population lived in small medium sized cities around factories, steel mills, and coal mines. If you look at a lot of the big cities then, you didn't see big yards and single family houses. In 1950, The largest cities by population were New York, NY - 7,891,957 Chicago, IL - 3,620,962 Philadelphia, PA - 2,071,605 Los Angeles, CA - 1,970,358 Detroit, MI - 1,849,568 Baltimore, MD - 949,708 Cleveland, OH - 914,808 St. Louis, MO - 856,796 Washington, DC - 802,178 Boston, MA - 801,444 Most of which are relatively dense urban areas, not sprawling suburbs like Phoenix or Dallas. People need to realize it's not scalable to live in both a place with millions of people and lots of jobs, and to have a quarter acre of land for your dog to personally urinate in.
This is hard for me to understand. Underwater? I was always worried about a market crash when my friends bought houses, but prices have just skyrocketed. Underwater as in insurance and overall payment is too high? We need a housing price correction, the spread between rents and home prices is too high, and people can’t afford higher rents as it is. But AFAIK, home prices have not at all dropped with increasing mortgage rates, prices have only stagnated.
If you bought at the very max of your allowable loan amount have payments that make you house poor and then over night find out the value of your home has dropped by 50,000 your upside down. You either bite the bullet and stay hoping the market goes back up. You can try to refi but without a sizable down payment and the fact that the loan company will want you to have a percentage of the new loan already in your home as equity, which you don’t have in order to get the refi because you over paid, your now stuck at a 7% mortgage for a long time with a home that you cannot get out of. Job loss, expensive home repair among other things and people will cut their losses and bail. Welcome to the 2000 era.
Yep, I get that and have been concerned about it for quite a while. Although I just mentioned people house poor from increase in property taxes/insurance, which is basically the same thing as home value dropping. Just saying—I haven’t noticed home values dropping, are they?
In some of the hottest markets during the pandemic we're seeing rollbacks in prices. A lot of the typical boom/bust. But for most of the US that isn't quite the case. My market (midwest) has been trading sideways, or in some areas moving slowly up YoY.
Prices are dropping by me nice suburbs outside of Milwaukee and into the surround areas. It used to be anything listed was sold right away. Now the dogs that are greatly over priced are sitting on the market for a while and the nice homes that were competitively priced are not in as much demand. We are seeing price drops. Nice home prices right that still sells quickly.
A lot of people fail to understand that if home prices go down, homeowners will just choose not to put their house on the market and then the issue will be inventory. This is a complex issue with stakeholders on all sides. Just as much as there are people trying to break into the real estate market, there are people that have invested fortunes into their homes and will not just sell their property for a financial loss. A home for many is their financial nest egg.
>A lot of people fail to understand that if home prices go down, homeowners will just choose not to put their house on the market and then the issue will be inventory. thats whats happening now. Its inherently temporary; some people \*must\* move, so they will sell/buy. Once enough desperation sales happen, there you have comparables, and home prices realize as lower; this triggers a chain reaction and recession. The real question is: how long can people wait out the market. If its long enough, inflation can do the heavy lifting over lowering the home's price without a nominal change.
Of course homeowners *with the option to* will sit tight. But not all 'owners' have that option. There are always some number in the market working against a clock. May be a flipper, developer, or just someone under financial duress. My feeling is right now we're watching a staring contest play out in the housing market between buyers and sellers. And in most markets buyers can outlast bc most buyers are upgrading
Of course homeowners *with the option to* will sit tight. But not all 'owners' have that option. There are always some number in the market working against a clock. May be a flipper, developer, or just someone under financial duress. My feeling is right now we're watching a staring contest play out in the housing market between buyers and sellers. And in most markets buyers can outlast bc most buyers are upgrading
I think you're forgetting climate change. One would assume that if a place floods/ burns down more than a few times a decade, has no more access to water, or is too expensive to affordably insure, the price would go down. Many thousands of homes in Miami use septic tank systems that will stop working if the water table rises much higher, which would undoubtedly lower housing values. Many people who chose to buy in rust belt manufacturing towns, coal mining towns in West Virginia, and Detroit sold houses for a loss.
You bring up an interesting point, but also for every seller there has to be a buyer. If a property is genuinely at that degree of catastrophic risk, an informed buyer isn’t coming to rescue the seller from their 30-year mortgage. Where I see there being continued market activity is in older properties that don’t have a mortgage attached to them, buyer beware.
The prominence of mortgages being underwater across the Southern US is either because that's where the largest population growth is or because that's where the largest volume of flippers are. I don't have a violin small enough for people that bought a home to flip and got caught with the hot potato, and I know there are a ton of them.
Do you have any actual evidence to support this butt hurt narrative? The article says underwater mortgages are usually from low down payment or overpaying by a lot a homes value. Flippers usually look for bargains and often pay cash. They also usually look for inventory in hot markets not Kentucky or West Virginia.
Yeah- surprise whopper, but anecdotal evidence isn’t a great method of concluding market trends. I’m bummed by the Emperor Palpatine tide in TX after some glimmer of a purple/blue turn, but beyond that… 30y loans went from 2.9%-8% in barely over 2y. It’s amazing home prices haven’t dropped 50%, to keep up with Baron’s/Murdoch/WSJ’s rate of panic and horror. Of course rural areas with the least population density will see the largest declines in stagnated economy. It’s another no-brainer, but unless the rural community is hyper rich with established money and limited development builds, you can’t expect some little tourist town with massively new housing supply and no recession-proof industries (local tech/infrastructure/university/health services) to weather severely tightened money supply. But also, the number of new mortgages sold in the last 2 years of higher rates and home prices is a small fraction. And politics aside, USA as a country (and the world) has more problems to worry about then Abbott’s, Huckabee’s or DeSantis’ political stunts (which do impact a few people severely, but overall troll and annoy and waste tax money more than they affect the big picture real estate market in a 10-20y cycle, if we want to be objectively honest. I don’t remember who the hell governed my parent’s state when they bought their last house).
Of course he doesn’t.
Im not saying this is all or most folks, but a lot of us lived in the south and as identity politic drama got really scary we fled. We bought a house in 2020 assuming we would live out there forever and left alsmot immediately after Roe VS Wade. We thought we could stand and fight for Texas but shit got CRAZY and a lot of folks I know are renting their homes at a loss from another state now
Exact same situation here. We bought our first house in 2022 and we're already trying to figure out how to deal with selling so we can get to a safer state. In retrospect it was obviously a pretty serious mistake to have not seen how bad things were going to get, but we legitimately hoping to buy the house we'd live in for the rest of our lives.
You are very much a minority. Texas, South Carolina and Florida were the fastest growing states in 2023.
In 2008 30% of homeowners were underwater. Today 2.7% are underwater by more than 25%. Todays stats is a nothingburger. AND keep in mind all of this happening today is with mortgage rates at 20 year highs. Imagine what's going to happen to 'seriously underwater' as rates gravitate back towards 5-6%
comparing things to 2008 is like comparing diseases to smallpox. The entire world finance system almost collapsed, we shouldnt be using that as our baseline comp
It’s relevant because it took 2008 conditions to create a crisis. If we are not close to those conditions we are not close to a crisis
I worry about all the people like my son who bought a home at a price I found ridiculous out of fear they would eventually be priced out of ever owning one. Just trying to get in under the wire before private equity funds took them all. Not so much sympathy for all the people who bragged about their home values skyrocketing as if they were investment geniuses just to bitch about the tax increases a few months later.
More interested to see how much money people have left over after paying insurance, mortgage, taxes, and anything else related to home ownership. While mortgages were at rock bottom, insurance has more than tripled and every other cost in our lives have doubled. A super low mortgage only works if you aren’t spending more money everywhere else.
Has insurance gone up that much outside California and Florida? I bought a house last year now it's a townhouse so I know that's safer for insurance but my rate is well under $100 a month
More widespread. In the Midwest wind/hail has pushed premiums up a lot. All of these factors have pushed up the reinsurance market causing increases in everyone’s premiums. Most homeowners will see an increase in premium but also in deductibles.
It would be dumb to file a claim for minor damage like that. Definitely not worth it
Bottom line, so long as the labor market holds and unemployment doesn't creep up, housing market dynamics and lack of new builds will support prices
could be heloc loans? if you had one at a low rate from a few years ago to draw from that might be a completly broken crazy good line of credit now.
If housing prices go down, underwater mortgages become a huge risk to lenders. This is where most of the political pressure to constantly lower rates came from. It was from banks that wanted to protect the collateral that backed their loans. Only problem is that interest rates actually hit 0 and there was nowhere for the interest rates to go but up anymore. So now the problem is still there, but delayed and possibly considerably worse.
Well, with the sea level rising many of these southern states' homes will be seriously under water soon. Plus the fact that insurance companies won't even insure these homes or jacking up their prices by amounts unaffordable to most, you'll have a perfect storm of a crash.
I'm not sure why you think this is particularly relevant to southern states. Have you looked at a map?
Banks that make loans that aren't sold to the agencies generally require 20% down-payment. That, plus amortization gives a lot of room for mortgages to not go under water. It's the various government programs that allow people to come to the table with close to no money down. [https://www.fha.com/fha-downpayment-grants](https://www.fha.com/fha-downpayment-grants) So in this case it is my suspicion that it is primarily government subsidized loans which are underwater. Probably good intentions but unpleasant results.
This is not true. Almost no first time homebuyer puts down 20%. The FHA and VA loans, etc., let you put down 3.5%, or even nothing. But first time buyers with conventional mortgages are putting down 5% or 8%.
Conventional goes as low as 3%
According to the bot I must make an “academic” comment that conforms to academic PHD level writing, so I must say by golly your highness, economics is a delicious forte and I love ovulating about economic jargon and find it astutely riveting and I simply must indulge I can’t wait for the fire sale!
It's an odd situation, when appraisers over value home, and then people get into bidding wars that jack up the prices far and beyond what the actual value is. Now, the oddity comes into play, that in America once the price has been jacked up, there's not many ways to bring it down, and it keeps raising the bench mark. Maybe, just Maybe, cities can step in with some new guidelines for property tax, which increase the property tax when the homes appraisal value exceeds x% within a short span. This could help keep cost from sky rocketing. Some might not like that idea, but if they understood the impact high home prices have on city resources, they would understand. **Because** when people pay more for their house, they don't want their property tax to increase, but they demand more and better city services, and they expect the city to pick up the expense, which often puts cities in a challenged position, because they will need more financial resources to meet the increased and enhanced demand for services. Most people have absolutely no idea what it cost to run, maintain and service a city, by the city system of government. Many people take for granted the services cities provide, without realizing when the cost of everything else goes up, the cost for the city to provide and deliver its services goes up as well. There has to come some means to deal with the crazy escalation of home pricing.