Does Underwater = Foreclosure ?

A very interesting WSJ article in the family finance section on what it means to being underwater in a home, and how it plays out in the foreclosure crisis.

All the talk of underwater households really depends upon whether you were a first time home buyer or not.

Those people who sold one house and bought another are in a less difficult circumstances than the first timers. I wonder how many people are in situation similar to mine: We sold a house for an big gain (100%) in 2006, and bought a home that is now a little underwater.  But the reality is that the loss on the current home is about the same as it would have been on the prior house; had we not moved, we would have had that much less of a gain on the old house. And when we move again, the loss on this house is likely to be offset by the decrease in price on the next home.

Here’s the WSJ Excerpt:

The number of underwater homeowners — those who owe more on their mortgages than their home is now worth — has been growing sharply since 2006 as real-estate prices have tumbled. By some estimates, between one in six and one in eight homeowners are in that position, most of them people who bought homes in the past few years or who put down small or no down payments.

This worries economists and policy makers, since owing more than your home is worth is the first step toward foreclosure. And it’s a concern to the rest of us because foreclosures are roiling the financial markets and, closer to home, they drag down our neighborhoods. (Most people who still have equity, by contrast, would rather sell their houses at a loss than lose what’s left of their investment.)

In response to concerns about rising foreclosure and delinquency rates, federal regulators are studying possible new programs aimed at needy homeowners. There are concerns that such programs could attract a flood of applications from those who don’t truly need assistance or encourage lenders to push homeowners into foreclosure. At the same time, lenders such as J.P. Morgan Chase and Bank of America have committed to working on new loan terms for the most-distressed homeowners.

Coming up with a realistic plan to avoid some foreclosures will be a challenge. And prices are still way too high.

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Previously:
Fixing Housing & Finance: 30/20/10 Proposal (September 2008)
http://www.ritholtz.com/blog/2008/09/fixing-housing-finance-302010-proposal/

Propping Up Home Prices, Stopping Foreclosures (November 3, 2008)
http://www.ritholtz.com/blog/2008/11/propping-up-home-prices-stopping-foreclosures/

Source:
‘Underwater’ Need Not Mean Foreclosure
Why Most People Who Owe More Than a Property’s Worth Will Still Keep Their Homes
KAREN BLUMENTHAL
WSJ, NOVEMBER 5, 2008
http://online.wsj.com/article/SB122583941535198573.html

See also:
Where Housing Crashed Hardest
NYT, August 24, 2008
http://www.nytimes.com/slideshow/2008/08/24/business/0824-MERCED_index.html