Wednesday, May 13, 2009

Negative Equity, Recovery & Mobility

Les Christie reported in his post for CNNMoney dated May 6, 2009, that according to a market analysis published on about 22 percent of American homes were "underwater" at the end of March. That is, in today's market the value of these homes is less than the outstanding balance on their mortgages. Home owners may wonder, how long recovery may take. The calculator below provides an estimate, regardless of the price of the home. The default entries are explained in the next paragraph. You may replace them with your own data:

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Suppose we bought a home with a down payment of 20 percent and a 30-year mortgage at 5.92% APR two years ago. According to a report on, the annual rate of appreciation for American homes has been on average 6.34 % over the past 40 years. This value seems high. Local rates may be lower. According to my own observations over the past 10 years, and these were years of unprecedented economic growth where I live, property values have appreciated at 5.7% annually. The rate may be substantially less in current circumstances.

Be it as it may, let us take the optimistic view and enter 6.34% as annual appreciation rate in the calculator as default. If we lived in an area of the country hardest hit by the recent slump in the real estate market, our new home may have lost half of its value since we bought it. That is, its value depreciated 50%. According to the result calculated above, we need to keep this home for 21 years to recoup our loss. As a consequence, mobility loses its luster. Many home owners may choose to stay put.

  • According to The Economist's daily chart post dated Aug. 21, 2009, Deutsche Bank's securitization team estimates that roughly every second American home with a mortgage will be underwater in 2011 (08/29/09).
  • Lisa Lambert reports in her post on Reuters dated Sep. 17, 2009, that another wave of troubled mortgages is about to ensue, potentially unleashing more foreclosures. That is, adjustable rate mortgages with payment options are beginning to reset in large numbers burdening home owners with ever higher cost. In Arizona alone, 128,000 payment option ARMs will adjust to higher rates within the next 12 months. In the meantime, the unemployment rate rose to 9.7 percent nationwide according to the Bureau of Labor Statistics (09/19/09).
  • According to Les Christie's report entitled "Nearly 25% of all mortgages are underwater" on CNNMoney yesterday, First American CoreLogic estimated that home values are still dropping under the value of their mortage. The company found that in the last quarter of 2009 mortgages on homes underwater increased by one percent to 10.7 million (02/24/10).

  • M.P. McQueen's post with the title "The New Rules of Remodeling" for the Wall Street Journal dated Apr. 24, 2010, confirms my prediction on rising immobility. Remodeling seems a good idea. Let us benefit from tax credits and put some energy efficient insulation in our home. Let us upgrade kitchen appliances and make our home a nicer place to live, because we may stay in it for a long time (04/28/10).
  • While modifying my calculator after one reader's cogent comment, I noticed that in the parlance of the Goldman Sachs bankers who testified before Congress two days ago our home, looked at as an investment, definitely qualifies as a very long sale. The banks, however, sold our mortgage short. Our mortgage was sold to Citigroup two years after we closed on the home. Since we could keep up with our payments, it probably ended up buried in tranche A of one of those sh***y CDO's alluded to in the hearing (04/29/10).
  • According to Conor Dougherty's report entitled "More Americans Moved in '09, but Not Far" in today's Wall Street Journal, the Brookings Institution estimates a state-to-state mover rate of 1.6 percent for 2008 and 2009, constituting the steepest decline in interstate migration since the Great Depression (05/10/10).
  • You may wish to listen to some homeowners whose diminished home value considerably affected their mobility in Yuki Noguchi's report on National Public Radio's Morning Edition today entitled "Devalued Homes Anchor Prospective Job Seekers" (08/26/10).
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Anonymous said...

think you need to check your math or list assumptions on closing costs.

if i enter 95% result is 10.24 years. 100% 9.41 years

Peter Melzer said...

Thank you very much for your kind feedback. The result of the depreciation, that is the present value of the home in percent of the purchase price, was to be entered into the formula. This may have been misleading, and I apologize.
To disambiguate, I changed the formula. Now, the loss in value in percent needs to be entered. That is, if the home had lost 95 percent of its original value (enter 95), you would have to wait for more than half a century to recoup your investment, closing costs and property taxes excluded. If the home did not depreciate at all, that is 0 percent (enter 0), ten years of appreciation would still be necessary to offset the cost of borrowing.
I hope that makes more sense, Peter

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Thank you very much for your cogent advice. When I started out publishing, I was naive about layouts and chose randomly from google's suggestions. The sister site to this blog href="" Peter's Blogshows a different layout.

Because of the greatly varying number of pictures in each post and different default font sizes among browsers, it is difficult to find a ubiquitously satisfying compromise.