I’ve been following the CoreLogic data on the number of underwater mortgages for over three years now, and it’s undoubtedly the most reliable time series we have on that front. Which is why this is so scary:
First American CoreLogic, the research firm that monitors housing equity, reported Tuesday that 11.3 million homeowners — or 24% of all homes with mortgages — were underwater as of the end of 2009. That’s up from 23% and 10.7 million borrowers three month earlier.
How could the number of underwater homeowners could have risen by 600,000 in just one quarter — especially when the latest Case-Shiller data shows national house prices more or less stable over those three months? I think the answer might lie in the seasonal adjustments: to take a couple of the more extreme examples, Dallas prices fell 0.9% on a non seasonally adjusted basis, while rising 0.1% on a seasonally adjusted basis, while Chicago fell 1.6% in nominal terms but only by 0.6% in seasonally-adjusted terms.
The biggest systemic risk posed by underwater mortgages, of course, is the fact that they’re much more likely to default. But if the decline in the value of your house is a cyclical, seasonal thing, then that’s clearly much better than if it’s likely to persist indefinitely.
On the other hand, we’re clearly in uncharted territory here — at the upper echelons of the credit scale, unsecured credit-card debt now carries a significantly lower default rate than secured mortgage debt. If the number of underwater homeowners is going up at the same time as the societal mores urging full mortgage repayment erode, then the ingredients for another real-estate bust are definitely in place.
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