According to a new report from Reuters, 10% of homes are underwater. No, this is not a global warming post we are talking about the loans being underwater, or the Homes being worth less (often much less) then the loan is currently valued.
According to Mark Zandi, Chief Economist at Moody's Economy.com, 8.8 Million Homeowners, or 10.3% of the total, are in over their heads. as a result millions of home owners have incentive to abandon their homes.
This ties to an earlier post as well as an article on msnMoneyBlog that quotes me in it (plug!). The issue is not just those people and the bad bank loans. It is also that underpriced homes are hitting the market at the worst possible time, when sales are abnormally low. The homes are underpriced because the banks want to get the houses off of their books, they have no reasons to hold them it is only tying up cash flow.
According to Mark Zandi, each foreclosure on a neighborhood block reduces the value of all homes on that block by almost 1.5 percent. That is a hefty hit! on a $500,000 house that $7500 gone. In many neighborhoods, especially in California's Bay Area and Detroit, you can have 20% being for sale! I don't believe that this is a cumulative affect, but more like a logarithmic one. In other words, one house in default would cost you $7500, two would cost $20-25K!
So when do they see it turning around? Zandi expects home sales to hit bottom this spring, housing starts to reach a nadir this summer and house prices to trough in the spring of 2009! Nice...
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