41 percent of metro area single-family homes believed ‘underwater’

More tough news for Twin Cities metro homeowners surfaced this morning as home values in the Minneapolis-St. Paul metropolitan area slid 4.6 percent in March from a year ago.

More troubling, the real estate website Zillow.com calculates that more than 268,000 Twin Cities area single-family homeowners with mortgages owe more than their homes are worth. That number is about 41.2 percent of the total. That compares with an estimated national average of 23.3 percent of single-family mortgages with negative equity, according to the report.

Such “underwater” mortgages in the metro area swelled by about 14,000 from December to March and pushed the metro area’s ranking up one place to No. 25among 135 metropolitan statistical areas (MSAs) tracked by Zillow.

That grim picture for the first quarter ended March 31 showed the Zillow Home Value Index (ZHVI) of $184,500 for the entire metro area also fell 0.6 percent from February to March. The home value index decline actually improved from the 5.3 percent year-over-year decline Zillow reported for February, but the number of underwater mortgages, which is only reported quarterly, continued to climb from December.

Years of easy loan terms requiring little or no money down contributed to the significant rise in mortgages with negative equity as home values slumped the past two years. In 2006, about 4 percent of home mortgages were “underwater,” according to Moody’s Economy.com. That total rose to 6 percent in 2007, 16 percent in 2008 and hit 24 percent nationwide at the end of last year.

The continuing growth in negative-equity home mortgages, combined with high unemployment, continues to feed the pipeline of home foreclosures, which some industry insiders have estimated will continue to grow through the end of next year, then level out at a higher-than-normal rate through the end of the decade.

In March 2009, the Obama Administration launched the program Making Home Affordable (MHA) program to help homeowners who may be at risk of default to modify the terms of first and second mortgages. Minnesota recently ranked 15th among the states in the number of mortgages modified under the program.

In the seven-county Minneapolis-St. Paul Statistical Metropolitan Area, only Anoka (0.2) and Scott (4.2) counties saw home values increase year over year, according to Zillow’s calculations. The largest percentage drops were charted in Minnetrista (-24.1), Independence (-24.1), Watertown (-22.5), Lilydale (-20.9), and Lake Elmo (-20.7). Cities and towns showing the largest home value increase were Centerville (12.5), Circle Pines (12.0), New Market (11.6), Lexington (11.2) and New Prague (8.7).

Different measure shows price uptick in February
Zillow.com is a real estate website that estimates the value of all homes, including condominiums, across the country and in large metropolitan areas, based on a variety of data. The widely quoted Case-Shiller Index, which is calculated from data on repeat sales of single-family homes only, most recently showed continued month-to-month declines in February for the metro area but a more hopeful year-over-year increase of 3 percent.

Zillow claims that by incorporating data beyond recent home sales, their index more accurately reflects what is happening across the spectrum of residential properties. If a particular category of home is “hot,” such as lower-priced homes have been recently, with the first-time homebuyer incentives, home value data derived only from sales can be misleading, argued Zillow spokesperson Alison Paoli. “By looking at values of all homes (including condominiums and homes that have not recently sold) the median values stays fairly constant over time,” she said.

Nationwide, U.S. home values fell 3.8 percent year over year, and 1 percent quarter over quarter, to $183,700, marking the 13th consecutive quarter of year-over-year declines, according to Zillow. Home values declined year over year in 106 of the 135 MSAs tracked by Zillow. Foreclosures reached a new peak in March, with more than one out of every thousand homes (0.11 percent) in foreclosure.

However, home values in several large California markets — the Los Angeles, San Diego, San Francisco, Santa Barbara and Ventura MSAs — have stabilized significantly in the past year, marking what Zillow says may be a bottom.  Home values in those markets have risen significantly for at least the past 10 months, after values in all five markets reached a low point in April or May 2009.

Source: Zillow.com

“It’s a very positive sign that several large markets have hit what appears to be a tentative bottom in home values,” said Zillow Chief Economist Dr. Stan Humphries in a press release. “While this is no guarantee that home values there will not fall again, it is more likely than not that they will remain above their lowest point last year.

 The statement continues: “However, we continue to have concerns about other factors playing out in markets across the country. We suspect that the homebuyer tax credits are, for the most part, stealing demand from later this summer, rather than creating new demand. Even with the tax credits in place during the first quarter, inventory levels were rising, and home values continued to decline at a steady clip, rather than steadying. Because of these factors, we believe national home values are more likely to reach bottom in the third quarter of 2010, rather than in the second quarter, as we had hoped. When we do get there, we expect the high rates of negative equity and foreclosures to keep national home value appreciation near zero for some time, possibly as long as five years.”

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Comments (15)

  1. Submitted by Richard Schulze on 05/10/2010 - 09:53 am.

    Something tells me that unemployment is structural this time, and a lot of boomers are exiting to part time or informal employment as they sit in their underwater debt palaces.

    People are beginning to realize that it will take much longer to recover lost equity than it would to rebuild damaged credit.Most homeowners with negative equity will probably not default, but this does suggest there are many more foreclosures coming – and more losses.

    One should be able to model this and project the numbers. We could get say, a tag like this: If your underwater by 22%, yet still employed there is a 1 in 7 chance you will walk away.

  2. Submitted by John Reinan on 05/10/2010 - 09:59 am.

    That’s a stunning statistic. However, I’d take Zillow estimates with a grain of salt.

    Looking at my own home on Zillow, I often have felt that the site wildly overestimated its value. At various times in the last couple of years, Zillow has valued my modest 3 bedroom Minneapolis home at $500,000 to $700,000. At the same time, comparable homes in my neighborhood were selling for $300,000 to $400,000.

    I love my home — it’s a nice little house in a great neighborhood. But there’s no way in the world anyone would ever buy my home for $700K, even at the peak of the boom.

    The estimated price of my home as calculated by Zillow also jumps and drops wildly, sometimes by as much as $50,000 in a single month.

    So although Zillow may have an accurate big-picture sense of our overall market relative to other cities, I’m skeptical of their numbers.

  3. Submitted by dan buechler on 05/10/2010 - 10:05 am.

    This is astounding but not surprising given how overpriced housing was in the mid decade. What % are second homes/condo’s? Would be great to have comments from a real estate professor. Also what would happen if you combine the 2 reports.

  4. Submitted by Paul Udstrand on 05/10/2010 - 10:30 am.

    I have to echo John’s skepticism. How is Zillow calculating values? The only real measurement of value is what you can actually sell your house for, how can value rise while prices drop?

    And the year over year “increase” is likely to be a statistical artifact, Banks have still not reported the full losses they’re likely to take on forclosed properties so we really don’t the true value of our housing stock. Your picking a low point that may or may not have represented real sale prices at the time and comparing it to subsequent years.

  5. Submitted by Richard Schulze on 05/10/2010 - 12:07 pm.

    Zillow me this:

    You unlock this door with the key of fiscal imagination. Beyond it is another dimension – a dimension of unsound lending, a dimension of slight overvaluations, a dimension of mind over matter. You’re moving into a land of both shadow and substance, of things and ideas. You’ve just crossed over into the Zillow Zone.

    The gap between Zillow and Cyberhomes in valuations is really absurd, and a national affair. I know which one county assessors would rather use.

    Most U.S. homeowners think a bottom has been reached: However, in the well documented “all children are above average” syndrome, 60% of the respondents thought their home price had declined in the last 12 months, when in fact 80% of homes lost value.

    So, what stage of grief is the mortgaged American homeowner in? Are they still at Denial, or did they go straight to Bargaining without stopping at Anger?

  6. Submitted by Brad Allen on 05/10/2010 - 12:08 pm.

    To all–

    Thanks for your comments.

    I don’t necessarily look at the point accuracy of a particular number or estimate, but if a consistent methodology is applied over time, whatever its innacuracies or biases, I’m interested in the trend..
    The take aways for me are:
    1 – home values in the TC metro decline y-o-y in March, but at a lower rate than in Feb.
    2 – the number and % of homes underwater increased over the last four quarters, and
    3 – The % of underwater mortgages is quite a bit higher than the US average.

    I’ll just add that other measures of underwater mortgages nationwide come to a similar ~22 -24% number.

    Dan — the underwater mortgages are for single family homes only — no condos. They do not break out primary residence vs second home.

    Also, I agree it would have been a good add to have a Real Estate professor’s view. Hard to do over the weekend, but worth noting.


  7. Submitted by Andrea Schaerf on 05/10/2010 - 02:04 pm.

    I looked at the price my home was once ‘worth’ and laughed. There was no way it was worth that. I could have sold it and made some money but my house is my home. Now I am mortgage free. My home is where I plan to live out the time I have left. I dont think of it in terms of what it is worth if I sell. If I need to leave it I am sure I wont care what its worth.

    If we think of our houses as homes not ways to make money we are fine as long as we can keep up the mortgage. I used to hear at work how folks pulled the equity out of their homes every time their values went up. I would think about the risk of doing this. At that time my home was valued at ten times what I paid for it. I knew that I couldnt afford any higher mortgage than I had so I stayed and now it is clear. Good thing with the property taxes!

  8. Submitted by dan buechler on 05/10/2010 - 02:31 pm.

    Thanks to the replies/comments but maybe I misread the headlines, what does it come down to in paper/facts. Are 40% underwater or not??

  9. Submitted by Gregory Lang on 05/10/2010 - 05:05 pm.

    I’d look close at the zillow fine print. What is a “mortgage” by their definition. Perhaps full mortgages originated in 2005 or I don’t know, maybe since 2000 but a huge housing value appreciation occurred from 2000 to 2005.

    It would be nice if this was listed as percentage of total single family homes. I used to work on the Hennepin County property tax statements. Admittedly this was around 2005 but with “homestead by zip code” but around half were not escrowing property taxes. Liens are another factor. Also, statistical data on year of sales nulling out family transfers and low dollar quit claims. This should all be easy spreadsheet data from public sources.

    To give an example I bought my house in 1986. With a new garage it stayed at 60K until around 1995. It peaked at $195K and dropped to $185K. I paid mine off in 19 years but with original 8% 30 year the P + I would have been $422 per month. On the older buys there is a certain “Darwinian” survival of the fittest. Home equity loans have been easy to obtain since 1990. Long term owners had plenty of opportunity to hang themselves.

    With real estate it is always “location, location and location”. My Minneapolis Longfellow (55406) neighborhood has a very slow turnover. On the other hand some of the largest foreclosure concentrations are out in the suburbs. A couple of weeks back I was out by Anoka, in Andover I think. There was a “starter castle” development near a big school that looked under 15% filled with random houses surrounded by mostly empty lots.

    That look “painful”.

  10. Submitted by Ray Schoch on 05/11/2010 - 08:23 am.

    The whole topic of home values has always struck me as oddly contorted. I moved to Minneapolis from metro Denver a year ago, and this is my first experience at being “under water.”

    I lost money (“Buy high, sell low” has been my life-long real estate motto) on the place I sold in Denver to move here, but I had enough equity in it that I still walked away from the sale with a little cash – enough for a downpayment of 5 percent here.

    I bought a small place in the city’s 4th ward for about $50K less than it had been assessed for a couple years previously, and my latest assessment from Hennepin County is for $30K less than the modest amount I paid for it, even thought the house was completely rehabbed before I arrived in Minneapolis – new kitchen, new bath, new appliances, blah, blah, blah. So, for the first time in my life, I’m “under water.”

    I’m inclined to agree with Andrea’s second paragraph above. More money-oriented neighbors over the years in other cities have made a profit (or lately, a loss) from their homes, but I’ve just never thought of a house purchase as primarily a financial transaction, though obviously it involves plenty of finance. A house is a place to live, and I’m old enough that this one may well be the one I die in. As long as I can make the payments on the mortgage, I don’t much care what happens to its value “on the market.” If I maintain it, it’ll keep the rain, snow and cold out, and provide a place for my granddaughter to play when she visits. That’s what shelter is supposed to do.

  11. Submitted by Hillary Drake on 05/11/2010 - 06:04 pm.

    http://www.calculatedriskblog.com/2010/05/report-112-million-us-properties-with.html has new statistics for all homes. They show about 18% of homes in MN are underwater.

  12. Submitted by Gregory Lang on 05/11/2010 - 10:49 pm.

    Thanks Hillary! 18% sounds like a more reasonable percentage of all homeowners in MN. The 41% seems like it would be of all “non-conventional mortgages. Again, this was mostly pre-2005 but at work a lot of people “moved up” to a larger home. Often they said their payments wouldn’t be much more because they had a lot of equity in their original home so they ended up putting a third to a half down on the newly purchased house.

    Mortgage companies and banks may have given out non-conventional loans like popcorn but these had a lot of expenses and fees you didn’t get with a high down payment trade up.

  13. Submitted by Gregory Lang on 05/12/2010 - 07:52 am.

    One more point. We should consider the term “under water” and what it means. I honestly don’t know but a better term might be “in water” versus “high and dry” to represent positive equity.

    To use the “water” example, if we have a lot of rain we will have flooding. Small puddles, you don’t get your feet wet,big puddles you do. Ankle deep is worse, then knee deep, ect. Same analogy with negative equity. How deep is the negative equity water. Ankle deep is different than hip deep.

    On the other extreme my hovel has zero debt so it is “high and dry”. I started out with a 30 year 8% fixed FHA loan in 1986. Not work looking up but I think around 1995 I got an FHA “Streamlined refinancing” with no takeout and a new 15 year 6.5% fixed cost loan. It was something like a $50 fee for it. That was my cost. When I next refinanced it was a zero takeout for the outstanding amount of the loan paid to the mortgage company. Again, under $100 cost to me. Probably zero, I can’t remember because it was so low.

    If you look at these “creative financing” arrangements there were thousands of dollars of fees (I often wonder if groups like Acorn were getting “finders fees”).

    When I got my first “streamlined refinancing” I had scenarios where I could save more. It rolled in a lot of fees but got a lower interest rate but it raised my potential loan liability for under $10 per month savings.

    The “cake eaters” like myself and my co-workers looked more at the debt liability rather than the cash flow. Again, my experience was mostly pre-2007, when I retired late in the year but I recall at work there were a lot of “trade ups” often to new developments. I recall discussing my refo experience and most at work also wanted to avoid the costs and fees. I suspect many had big equity drops but are not technically “under water”. (this is complicated and this is not my main interest)

    The problem was that there were not enough “prime” borrowers relative to the money available to loan. To coin a derisive term try “pony pickers” as a betting metaphore.

    I had a new furnace installed in my http://searshouse.com in something like 2001. A Minneapolis inspector who looked over the work said he parlayed money from the home equity into stocks just before the dot-com bust and lost a lot.

    In 2009 I had a furnace breakdown. The young man who fixed it told me that HVAC was busy before the crash so he bought a new house just to live in. His company is established urban doing mostly older house HVAC replacement and repair but he got nailed. The value of his urban used house went down and with the severe decline in new construction there is a lot more competition for this “legacy” work. I consider this young man to be a responsible person caught in this rather than a “pony picker”.

  14. Submitted by Leigh Vintson on 05/15/2010 - 11:49 am.

    So if Zillow over-estimates home values, I think so in Portland, Oregon, too, then wouldn’t their underwater estimates be a bit low?! That’s a scary thought.

  15. Submitted by Alison Paoli on 05/20/2010 - 02:32 pm.

    Alison from Zillow.com here. There has been some great conversation going on here. A few of you have brought up questions about the data used in this article and I’d like to address your questions.

    First off, Zestimates: We continually test Zestimates against actual sale prices to calculate our exact accuracy in every area (down to the ZIP code level). Because our Zestimates are just as likely to be low as they are high, when they are aggregated, the result is very accurate. But if we find that Zestimates are systematically above or below sales prices, we adjust our calculations to cancel out any local bias in Zestimates before calculating the Zillow Home Value Index and negative equity data. And yes, since home values are recalculated every 3-4 days, sometimes the Zestimate will jump a considerable amount over a short period of time, then jump the other way. However, it is important to pay attention to the trend. As any statistician would say, year-over-year change is always going to be more accurate than just looking at a week or two.

    Second, Home values vs. home sale prices: Those are the two most common ways of evaluating a housing market. However, the differentiator is that home sale prices are reflective of what is selling, the current mix. During the run up to the bubble higher end homes generally tended to sell more frequently. During the downturn lower end homes were generally selling more frequently. With that occurring the ‘median’ shifts, sometimes dramatically. Since home values look at all homes the median remains near constant and when looking over time is a better method to determine trends, especially in a market that has had some big swings.

    Third, with regard to negative equity, there are a couple of major factors that contribute to the ‘underwater’ number.
    1) A drop in home values (home values have fallen 25.1% from the peak in mid-2006 and are now back to mid-2002 levels)
    2) Indirectly but related, a rise in foreclosures puts downward pressure on nearby home values (For the TC metro 23.9% of all homes sold in March, was a foreclosure re-sale) However, foreclosures can also have an opposite effect on negative equity rates by taking homes in negative equity and selling them to new homeowners who will have instant equity.
    3) A high number of homes purchased at or near the peak with little to no money down (during the summer selling season prior to the peak roughly 7k-9+k homes were selling per month, up from a rough monthly average of 3k-6k).

    All three of those major factors have occurred in the TC metro (with the exception of the down payment amount, I do not have data on that but little to no down payment was very frequent occurrence at the build up and height of the bubble).

    Fourth, when we refer to ‘mortgages’ our analysis includes first and second mortgages taken out at the time of purchase which include all loan types. We do not account for payment against the principal which is standard practice. Typically, principal payments against the outstanding loan amount are very small in the early years of a mortgage.

    And finally, commenter Hillary Drake refers to CoreLogic data that says roughly 18% of Minnesota state homeowners are underwater. Our data looked at the metro, not the state.

    You can email me directly at alisonp ‘at’ zillow ‘dot’ com if you have any questions or leave a comment below.


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