Underwater Mortgages: How Much?

Underwater . . vs. Drowned

According to The New York Times, "about $500 billion in mortgage debt is already underwater" ("Bailout Likely to Focus on Most Afflicted Homeowners"). That's realtor-speak for a house being worth less than the mortgage against it.

Unfortunately, based on my calculations, that number appears to be conservative.

Using industry statistics, and a blend of various housing price indices (National Association of Realtors, S&P/Case-Shiller, etc.), I estimate that more than $540 billion in mortgage debt nationally is now underwater. Of course, that number continues to rise as home prices fall.

Here is the math, along with the underlying assumptions (downpayments are presumed to rise steadily from 2006, as lending standards tightened; homes sales include both new and existing):

2006

Home sales (units): 6.5 million

Sale price (ave.): $250,000
Down payment (ave.): 5%
Mortgage (ave): $237,500
2009 market value: $187,500
Amount "underwater" (ave): $50,000
Total -- all homeowners: $324 billion underwater

2007

Home sales (units): 5.7 million

Sale price (ave.): $233,000
Down payment (ave.): 7.5%
Mortgage (ave): $215,525
2009 market value: $187,500
Amount "underwater" (ave): $29,125
Total -- all homeowners: $165 billion underwater

2008

Home sales (units): 4.9 million

Sale price (ave.): $220,000
Down payment (ave.): 10%
Mortgage (ave): $198,00
2009 market value: $187,500
Amount "underwater" (ave): $11,000
Total -- all homeowners: $54 billion underwater

Underwater mortgages - Total: $543 Billion

As the foregoing shows -- and the chart illustrates -- the closer to the 2006 peak one bought, the further underwater they are.

To round out the picture, some further tweaking is necessary.

Specifically, add: 1) the "pre-peak" home buyers in 2004-2005 who still caught some appreciation, but who lost that (and more) in the subsequent decline; and 2) all the homeowners who borrowed against their homes via home equity loans and cash-out refinancings.

The main subtraction would be the three million-plus homeowners who've already lost their homes to foreclosure. According to Moody's Economy.com, foreclosures could swallow another five million homes the next three years.

If so, that will certainly reduce the number of underwater mortgages -- but only because a corresponding number of homeowners will have drowned.