An important article in today’s Wall Street Journal exposed how dire the national housing crisis has become. Today, across the country, one in six homeowners is underwater in their mortgage. By this, The Wall Street Journal reports, nearly 16% of U.S. homeowners owe more on their mortgage then their home is worth. In a county where the economy has been fueled during tough times by homeowners drawing upon their home equity to maintain their standard of living, the evaporation of equity is a major contributor to current economic problems.
According to the Journal:
The result of homeowners being “under water” is more pressure on an economy that is already in a downturn. No longer having equity in their homes makes people feel less rich and thus less inclined to shop at the mall.
And having more homeowners under water is likely to mean more eventual foreclosures, because it is hard for borrowers in financial trouble to refinance or sell their homes and pay off their mortgage if their debt exceeds the home’s value. A foreclosed home, in turn, tends to lower the value of other homes in its neighborhood.
About 75.5 million U.S. households own the homes they live in. After a housing slump that has pushed values down 30% in some areas, roughly 12 million households, or 16%, owe more than their homes are worth, according to Moody’s Economy.com.
The comparable figures were roughly 4% under water in 2006 and 6% last year, says the firm’s chief economist, Mark Zandi, who adds that “it is very possible that there will ultimately be more homeowners under water in this period than any time in our history.”
In Austin, however, we are very, very, very lucky to have been spared from the worst effects of this emerging crisis. While real estate values across the city have dropped by a percent or two, we have largely avoided the catastrophic drops that have plagued California, Florida, Michigan, Arizona, Nevada, and other parts of the country.
When home values spiked across the country, values in Austin grew at a much more moderate pace. This trend has benefitted Austin on the way down: As the bubble burst across the country, Austin prices have stayed relatively stable.
Wall Street Journal Map: Red Indicated Areas Where Large a % of Homeowners Are Under Water
When home values fall dramatically, homeowners are left without attractive options. In addition to losing their down payments and home equity, buyers across the country have found themselves unable to refinance unattractive mortgages because they lack real equity in their homes. In addition, many buyers are unable to sell their houses because they do not have the cash required to bridge the gap between the homes value and the large mortgage balance that they owe.
While national financial markets continue to deteriorate, the Austin market could always turn negative. So far, however, reasonable prices, a strong local economy, and net inbound migration have kept prices stable. If the current trends continue and Austin real estate values hold, we should count ourselves as incredibly lucky.