Housing Alert: 27 Percent of Homes Now Underwater

Underwater mortgages have surged to 27 percent in the United States after a disappointing drop in home prices, according to the latest quarterly real estate market survey released by Zillow.com. The report noted the number of people who owe more on mortgage loans than their homes are worth jumped 3.8 percent in one quarter.

Foreclosures and Lowered Home Prices to Blame

The significant increase in underwater mortgages (at 20 percent in August 2010) has everything to do with the cycle of foreclosures and lowering home prices. According to Zillow.com, home prices dropped 2.6 percent nationwide during the last three months of 2010 and 5.9 percent over the past year because record-high foreclosures continue to drive them down.

Most homeowners still owe the same mortgage amount (or higher) they did when they purchased their homes prior to the housing crash in 2008, so it’s inevitable that unless a home was purchased at a very low price before the crisis, it will drop underwater. As more mortgages go underwater, more homeowners will have problems paying their mortgages.

Unfortunately, as noted by Zillow’s chief economist, Stan Humphries, underwater mortgages are second to unaffordable payments as reasons why homeowners fall into foreclosure, which means if homeowners do not receive assistance for this issue, the foreclosure rate will increase and the cycle will continue.

Short Sales Becoming a Way Out

In order to avoid the issues associated with foreclosure, some have been able to get their mortgages off their hands by selling homes at a loss. According to Zillow.com, one-third of all homes were short sales in December 2010.

But this isn’t necessarily a good thing. While a short sale can help avoid the credit problems associated with foreclosure, it also leaves the homeowner in the difficult position of being without a home or money to show for their investment.

In September 2010, the FHA proposed an underwater bailout option for struggling homeowners that could provide some relief. But because the option is still new, its success in saving underwater homeowners from foreclosure has yet to be determined.

Unfortunately, if homeowners continue to walk away from houses, the empty homes on the market will depress neighborhoods further and result in even lower home prices. With mortgage interest rates reaching a 10-month high of 5.13 percent last week, according to the Mortgage Bankers Association, the likelihood of homes moving off the market and putting an end to the cycle is slim to none.