August 14, 2009

Could your house soon be "underwater"?

"How high's the water, mama?" Johnny Cash sang in "Five Feet High and Rising."

A report from real-estate tracking firm, Zillow.com offers an answer: it's getting higher. Zillow's second-quarter numbers, reported by Bloomberg, show that almost one-fourth of U.S. mortgage holders were "underwater" — i.e., the balance on their mortgage exceeded the value of the house.

Just last week, a study from Deutsche Bank projected that close to half of the nation's 52 million mortgage borrowers could be "underwater" by early 2011. (That conclusion is disputed here.)

Could the rising water put you under? That largely depends on how large a down payment you made, what kind of loan you chose, and how long you've been in your house.

But even if you were wise in all those things, you still might get hit because of what SmartMoney.com calls "the broad and persistent decline in home values."

SmartMoney offers "four warning signs" that the water around you might be rising:

Foreclosures in your neighborhood.... As homes go into foreclosure, they create a domino effect, lowering home values throughout a neighborhood in a cascade beyond homeowners' control.
Homes lingering on the market.... Compare the time it took for homes to sell in your neighborhood three years ago vs. today; if it's taking weeks or months longer to sell, the prices homes can fetch are dropping, [says Mark Zandi, chief economist at Moody's Economy.com].

Increasing unemployment. In most cases, the cities where homes have lost the most value during the past year also possess the highest unemployment rates.

Homes in disrepair. Dented siding, peeling paint and broken porches could be signs that neighbors are having trouble making ends meet and can no longer pay to take care of their home, Zandi says. Or they may have gotten an appraisal and discovered their homes have dropped in value and are no longer worth the cost of repairs.

Fortunately, as SmartMoney notes, being underwater has relatively little effect on homeowners who don't need to sell right now (or qualify for a loan). The article quotes Zillow spokeswoman Amy Bohutinsky: "Individuals who are staying put for at least the next five to seven years will likely recoup the lost value of their home."

Our August Level 1 article offers guidelines for those who are already underwater and are no longer able keep up with their mortgage payments.