Heard on the radio today. Caller bought a house in Merced, CA for 300k in 2005, now the house is worth 150k. Multiply this situation for all purchases made in 2005 in Merced. Isn't everyone who bought a house in merced in the last 4 years under water ? When the loan goes into foreclosure the caller loses all the equity he has paid up to the bank and the interest payments for sure. All housing loans are structured to pay of the interest first so the principal payment to the house is negligible.
Now assuming an area like Cupertino, CA which hasnt' seen such a drop, maybe 10%. By definition if the owner's equity portion on the house in the first few years is negligible so without doubt this buyer is under water too. By this metric all housing transactions made in the past 4 years should leave their owners under water. Houses prices have dropped to levels more then the outstanding loan amount because of negligible payments made towards the principal.
Lets random sample a house in Santa Clara, CA using Zillow in one of the sought of areas by Indians and Chinese first generation immigrants.
06/19/2009: $660,000
03/14/2001: $650,000
4% closing costs of $650k = $26,000
Total cost (2001) = $676,000
Downpayment ~10% = 76,000
Total Loan ~90% = 60,0000
Total interest paid at 5.4 % till date = 243,311.60
Total principal paid till date thru monthy payments = 80,000
Property taxes = 8,000 x 8 = ~64,000
Income Tax Interest deduction in taxes at 30% = -80,000
House maintainence cost 3,000 x 8 = 24,000
Total equity in the house = 76k + 80k = 156k
Total cost of ownership = 243k + 64k + 24k = 331k
Outstanding loan =520k
Total Loss = 660 -(520k + 331k) + 80k(IT deduction) = -111k
Total Loss for owner over 8 years = ~$111,000
Lets assume owner had rented the place for 2k a month as an average over 8 years = 2 x 12 x 8 = $ 192k total
Assume the owner saved the difference between mortgage and the rent (3.3k -2k) = 1.3 x12 x 8 = $125k
Total savings in the bank of renter = downpayment + difference = 76 + 124k = 200k
Assuming an average return of 3% over 8 years of 200k, yielding simple interest = 48k
Total savings with renter in the bank = ~248,000
Underwater mortgages hurt home sales and increase delinquencies and foreclosures.
People who have to pay their mortgage holder to sell their homes are less likely to be sellers. A home sold for $200,000 when it has a $250,000 mortgage is a home that the owner may not be able to afford to sell.
People living in homes with monthly mortgage payment that stretch their abilities to cover their living costs may stay in homes that they believe have a lot of equity and where a sale will eventually bring them a profit. That hope for a bonanza may encourage them to go through the agony of making large payments. People who have no hope of making money on their homes are more likely to be willing to abandon them or be kicked out.
Both of these trends make it more likely that the housing sales pace will continue to be slow and property values will not recover.
Real estate research firm Zillow says that 23% of mortgages are now underwater. The company adds that the number could be 30% a year from now.
One of the major reasons for the trouble is that home values fell 12.1% year-over-year in Q2 to a Zillow Home Value Index of $186,500, resulting in a total 22.3% drop in value since the market peaked in mid-2006. Twenty-two percent of all transactions in June were foreclosures, a possible sign that people are not willing to fight until the end to save their houses.
