Despite signs that the real estate market is bottoming out, millions of homeowners are likely to find themselves in worse shape within the next two years.
Nearly half of the nation's 52 million mortgage borrowers will have negative equity by the end of the first quarter of 2011, up from the 14 million at the end of this year's first quarter, according to estimates in an Aug. 5 report by Deutsche Bank. With so many borrowers "underwater" -- or owing more on their mortgages than their homes are worth -- the risk is high that they'll default and their homes will go into foreclosure, says Mark Zandi, the chief economist at Moody's Economy.com. (Moody's Economy.com estimates that 17.5 million mortgage borrowers will be underwater by early 2010.)
Negative equity is the product of several factors. The most significant weight is the broad and persistent decline in home values. A Zillow.com index of home values fell 12.1% year-over-year during the second quarter, resulting in a total drop of 22.3% since the market peaked in mid-2006, according to an Aug. 11 report by the online real estate marketplace. Many buyers who bought their homes around the peak with a 20% down payment have lost that dollar amount.
"The continued decline of U.S. home prices will contribute to rapidly rising rates of negative equity," Karen Weaver, a Deutsche Bank research analyst, wrote in the report. "The most obvious implication is for mortgage defaults."
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Current homeowners, or those shopping for a home and who are concerned that they'll end up underwater, should consider how long they expect to live in their homes. Being underwater doesn't affect homeowners unless they plan to sell, Zandi says.
Individuals who are staying put for at least the next five to seven years will likely recoup the lost value of their home, says Amy Bohutinsky, a Zillow.com spokeswoman. In addition, homeowners should refrain from borrowing against their mortgages, she says.
Those who find themselves underwater can turn to the federal Making Home Affordable plan, which can help you refinance or do a loan modification. You'll have to meet the eligibility requirements listed here.
Whether you're at risk for falling behind may have more to do with the economy and your neighborhood than your job, your credit or your income. Here are four warning signs that you're heading underwater.
Foreclosures in your neighborhood
The quickest way to end up underwater is to live in a neighborhood that's plagued by foreclosures.When one home on your block goes into foreclosure, your home's value drops by 1%, Zandi says. But that isn't a one-to-one relationship. If two homes on a block go into foreclosure, your home's value will drop by more than 2%.
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As homes go into foreclosure, they create a domino effect, lowering home values throughout a neighborhood in a cascade beyond homeowners' control. (For more, see "Foreclosure nearby? It's your problem.")
You can find neighborhood foreclosure listings at MSN Real Estate.
Homes lingering on the market
When "For Sale" signs linger in a neighborhood for three or more months, that may mean buyers and sellers can't agree on a price. In that environment, homes are unlikely to sell unless the sellers lower their asking prices."The time on the market is always a good barometer of demand for homes and for the price homes are transacting at," Zandi says. "The longer it appears that neighbors are taking to sell their home the more likely it is they're not getting the price they want and that prices are falling."
Compare the time it took for homes to sell in your neighborhood three years ago versus today; if it's taking weeks or months longer to sell, the prices homes can fetch are dropping, Zandi says.
MSN Real Estate's home valuation tool includes time-on-market information.
Continued: The 900-pound unemployment gorilla
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